Full impact of 2003 rate cuts 'not yet seen'

Posted On Wednesday, 25 February 2004 02:00 Published by
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The economy's lacklustre performance last year was unlikely to convince the Reserve Bank's monetary policy committee that another interest rate cut was needed

 
February 25, 2004

By Vernon Wessels

Johannesburg - The economy's lacklustre performance last year was unlikely to convince the Reserve Bank's monetary policy committee that another interest rate cut was needed to accelerate growth, economists said yesterday.

The supply side of the economy, which Statistics SA measures, and the demand side, which the Reserve Bank monitors, were on diverging paths.

Demand has been fairly robust because of tax breaks, wage settlements way above slower inflation, and interest rate cuts totalling 550 basis points since June.

The supply side, however, has been constrained by a stronger rand, sluggish world demand and drought conditions in agriculture. The gross domestic product (GDP) numbers released by Stats SA showed the economy expanded by only 1.9 percent last year from 3.6 percent in 2002.

"The full impact of the 550 basis point cut in lending rates has not fully fed through into real activity, yet domestic demand is fairly robust," said Adenaan Hardien, the chief economist at African Harvest Fund Managers.

"With the supply side of the economy continuing to be constrained ... demand is likely to continue to outperform supply over the next few quarters. And this will maintain the pressure on the current account [as more goods will be imported into the country to meet demand]." 


The deficit on the current account, which measures the difference between exports and imports and income payments, was expected to have widened to 2 percent of GDP in the fourth quarter from a 1.6 percent deficit in the third quarter.

"Inflation is bottoming," Hardien said. "Rising food prices, high oil prices, sticky unit labour costs, among other factors, have raised the risk of CPIX inflation breaching the upper end of the 3 percent to 6 percent target range late this year or early next year.

"This is not an environment that allows for further monetary easing," Hardien said.

CPIX is headline consumer inflation less mortgage rates.

John Loos, a senior Absa economist, did not believe consumers needed more interest rate relief. He pointed out that the country's ratio of debt to disposable income was 53.7 percent (from 50.7 percent at the end of 2002), which was low compared with those of its main trading partners.

Ettienne le Roux, an economist at Rand Merchant Bank, said rates would remain stable as the country's growth would be supported by government spending and world growth.


Publisher: Business Report
Source: Business Report

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