In line with market expectations, the Reserve Bank has left interest rates unchanged — but economic analysts, business and labour do not expect it to meet its inflation target for 2004.
Announcing the monetary policy committee’s decision on Thursday, the bank’s governor, Tito Mboweni, cited the recent strengthening of the rand, lower oil prices and falling producer inflation as among the factors encouraging a buoyant outlook.
Figures released by Statistics South Africa on Wednesday showed that the Producer Price Index (PPI) for October grew by an annual rate of 14,6%, down from 15,4% in September and marginally below market expectations.
Inflation in the problematic food and manufacturing sectors slowed from 28,3% in September to 26,8%.
Iraj Abedian, chief economist of the Standard Bank Group, says food inflation will start coming down because of the end of the drought in Australia and North America and an improved currency.
Mboweni also noted the significant decline in the PPI’s quarterly rate. It has fallen from 26% in the first quarter of the year to 10,4% in the third.
The index is starting to show the effects of a strengthening rand, in the same way that its upward spiral was caused by 37% depreciation in the value of the currency.
Analysts expect the downward trend in producer inflation to continue to accelerate rapidly from the beginning of next year, feeding through to consumer prices.
The monetary committee’s impending decision on rates caused some drama in the bonds market, which expects interest rates to decline in the long run. Currently the short-dated R150 bond, which matures in 2005, is trading at a higher yield than the longer-dated R153, which matures in 2010.
When interest rates are falling, the converse applies. Half an hour before the decision was announced, the R150 had a yield of 10,98% and the R153, 10,77% — a difference of 21 basis points. Earlier in the week the R153 was 60 points lower.
After the announcement the gap widened to 27 points as the R150 rose to 11,14%, while the R153 went to 10,87%. At one point the difference touched 30 points.
Rick Kerwin, a bond strategist at Cadiz Stockbroking, said this was a mere correction. Kerwin said the market ”got ahead of itself” after a rumour from London that there would be a rate cut. When a cut did not materialise, the correction had to occur.
Abedian expected rates to remain unchanged at least until the middle of next year in the interests of financial market stability.
”To keep rates high for a bit longer is less harmful than to bring them down rapidly and thereby cause foreign exchange volatility,” he said.
Abedian said the benefit of holding rates steady was that when inflation started to come down next year, real interest rates — the difference between the quoted rate of 13,5% and inflation — would increase. This should lead to an inflow of capital and bolster the currency.
But according to a survey on inflation expectations released by the Bureau for Economic Research on Thursday, analysts, business leaders and the trade union movement do not expect the Reserve Bank to meet its 2004 inflation target of 3% to 6%.
The kindest forecast was by analysts, who expected inflation to average 6,4% in that year. Executives feel it will be at 8,1%, while workers’ organisations are most pessimistic, putting it at 8,8%.
The average inflation expectation for next year across all the groups jumped from 7,6% in the third quarter to 8,6% in the fourth. Inflationary expectations influence spending and saving decisions, as well as production decisions and wage demands.