Despite recent remarks by South African Reserve Bank governor Tito Mboweni which appear to torpedo hopes of an early interest rate cut, economists at one of the country’s biggest financial institutions, ABSA, believe a rate cut as early as March is still possible.
ABSA economist John Loos says that there would still be a decline in inflation, even if the rand had to drop. Loos believes inflation will decline steadily to below the 6% level, which would be within the Reserve Bank’s CPIX (inflation excluding mortgage rates) target range.
“We’re fairly confident that inflation will decline steadily and even rapidly. So the rate cuts could, we believe, start in March,” he says.
The Monetary Policy Committee, which decides on interest rates, is due to hold its first meeting on March 19 and 20. However, Mboweni said last week that inflation must move in the right direction before there can be any changes in the interest rate.
“We have seen speculation from a number of professional economists and dealers who expect interest rates to come down quite significantly this year. I don’t know where they get this kind of thing from,” Mboweni was quoted as saying.
“Until such time as we see inflation moving significantly in the right direction, it is premature to start speculating about any changes in interest rates,” he added.
Mboweni said he was waiting to see December’s inflation figures, due out later this month. Inflation should begin to come down this year, but data currently show the CPIX still running well above the target range.
The Bank’s monetary policy committee would begin to review rates only once inflation had fallen quite significantly, Mboweni said.
While bullish on interest rate cuts, of which he believes there will be three this year, Loos only expects economic growth of about 2,3% for the year.
Given the slower rate of economic growth, it’s not likely to be a good year for equities and business confidence in general, he says.
“Don’t expect much from equities this year.
With the prospect of a banking empowerment charter and other possible factors, there could also be some investment jitters “like we saw with the mining empowerment charter”.
US equities are also not adjusting as fast as European equities and emerging market equities are also outperforming major markets. A war in the Gulf could also impact on oil prices.
Loos says that he’s also not convinced that a war would be good for the US economy: “I don’t believe that any lengthy war could be a stimulus for the US economy.”
He believes that, structurally, Europe is in better shape economically than the US and that the European Central Bank has more room within which to manoeuvre to cut interest rates. – I-Net Bridge