OWN CORRESPONDENT and MARIAM ISA, Johannesburg | Tuesday
SOUTH Africa’s central bank has been praised for refusing to use its precious foreign exchange reserves to shore up a tumbling rand, but may be forced to cut interest rates to breathe life into slow economic growth.
The bank is expected to keep interest rates steady at its policy meeting this week, but faces tough decisions later this year, with opinion still split on its next move, say economists.
Most analysts believe the Reserve Bank will hold its monetary fire at the end of a regular two-day meeting this week, despite the rand’s descent to a record low against the dollar.
But they say disappointingly slow growth in the economy provides scope for another cut in interest rates next year, despite the inevitable inflationary impact of the rand’s weakness, coupled with stubbornly high oil prices.
”There is no demand-led inflation in prospect – that should lean towards further easing in rates. We need to get economic growth up there,” Investec economist David Galloway said.
Galloway is predicting a 50 basis points (half percentage point) cut early next year – which he said would not have much direct impact on the economy but would go a long way to boosting consumer confidence, still wary after the shock of punishing rate hikes in 1998.
Economists say the impact of the rand’s latest fall against the rampant dollar – amounting to 17 percent this year – will have a limited impact on domestic prices because the currency has been far more stable on a trade-weighted basis.
Some economists are sticking to the view that the next move in South African lending rates – which have fallen to 14.5% from a peak of 25.5% during the 1998 emerging markets crisis – will be upwards.
They point to the fact that the central bank’s benchmark inflation measure known as CPIX rose by eight percent in the year to July – well above its newly-introduced target of three to six percent, which must be its average over 2002.
August inflation figures due this week are likely to back the case for a rate rise, with sharp increases in all the main measures seen as a result of hikes in domestic fuel prices, which have climbed by 70% since February 1999. – Reuters