It is “too early to speculate on interest rates cuts”, South African Reserve Bank (SARB) governor Tito Mboweni said on Thursday. Mboweni, who has just returned from the World Economic Forum meetings in Davos, was talking on independent station Radio 702.
This was the same message he gave on January 16 in an interview in the English-language South African financial newspapers Business Day and Business Report.
“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 that kind of thing from,” he told the newspapers.
In 1999, South Africa cut its prime rate eight times, from 23% in January to 15,5% in October. Mboweni at the time was responsible for the day-to-day running of the SARB, while he only officially took over as governor in August 1999.
In November last year the US cut interest rates in response to renewed weakness in the global economy. This was followed by a cut in rates by the European Central Bank.
South African exports plunged by 21% in November from October in response to the downturn in global demand.
“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,” Mboweni said in the newspaper interview.
On Thursday he said the speculation could start once inflation had fallen significantly towards the inflation target.
Mboweni pointed out that the latest CPIX inflation (headline inflation excluding mortgage costs) was up 12,4% y/y for metro and other areas in December and this was more than six percentage points above the upper limit of the annual average CPIX target range of 6% to 3%.
In 2001 the average was 6,6% and in 2002 it was 10% and most economists expect CPIX to average near 8% this year and only be within the target range on annual average basis in 2004.
“We are not yet out of the woods on the inflation front. It is going to take a bit of time,” Mboweni said.
Despite the prospect of no early interest rate cut, Mboweni remained optimistic on South Africa’s growth rate after having returned from the WEF meeting at Davos.
“The prospects for the global economy are not good and a war with Iraq will not help the situation. South Africa comes off fairly well so far and we still expect growth of between 3% and 3,5% this year. That is very good given the slowing world economy,” Mboweni said.
In 2001 the South African economy grew by 2,8%, which increased to a growth rate of 3% y/y in the first three quarters of 2002.
In particular, Mboweni was “fairly encouraged” by the pick-up in formal employment for the first time since 1989.
The increase in the formal non-farm sector employment in the third quarter capped a remarkable recovery in South Africa’s economic fortunes from the depths of despair it had reached just over a year ago, when the rand touched a record worst level of R13,86 per dollar on December 20, 2001.
The recovery started the next day when Finance Minister Trevor Manuel and Mboweni issued a joint statement reiterating that South Africa’s economic fundamentals were sound.
At its 51st National Conference in December 2002, the ruling African National Congress (ANC) crowed about the progress made since elected to power in April 1994.
Manufacturing labour productivity has soared by more than 48% since 1994, which is a performance more than twice as good as the American “productivity miracle” over the same period.
American manufacturing employment in November 2002 was at the same level as November 1961.
In South Africa by contrast, manufacturing payrolls added 15 768 people during the third quarter 2002, the most of eight industry sectors. The measured component of the formal non-agricultural business sector showed an overall quarterly increase of 0,5% or 25 128 employees.
The quarterly increase was reflected by five of the eight industries. The manufacturing industry was followed by the mining and quarrying industry (+9 187 employees or +2,2%); the measured component of the community, social and personal services industry, which includes the government sector (+2 708 employees or +0,2%); the measured component of the transport, storage and communication industry (+2 312 employees or +1,2%); and the measured component of the financial institutions industry, which includes banking institutions and insurance companies, (+343 employees or +0,2%).
To underline the changed perceptions of South Africa and its currency, the rand was the best performing currency against the US dollar in 2002 and this strength has continued in 2003.
On Thursday it was trading stronger than before September 2001 as it touched R8,5350 per dollar.
The more than 25% recovery in the rand from the September 12 2002 level of R10,67 per dollar has prompted South African fund managers to slash their offshore holdings in December 2002 to 14% of total assets. This is its lowest level since September 2000. – I-Net Bridge