Monetary policy in South Africa will continue to tighten in the months ahead as the real prime interest, which is also the home loan rate for most people, continues to rise.
At the consumer inflation level, where cuts in the home loan rate reduce the cost of home ownership, the real prime rate is set to triple from 4% (nominal prime rate of 17% minus consumer inflation rate of 13% y/y) in October 2002 to above 12%(nominal prime rate of 13,5% minus consumer inflation rate of 1,1% y/y) in November 2003. This scenario is based on Standard Bank’s forecasts.
At the CPIX level, which excludes the effect of the home loan rate on consumer inflation, the real prime rate moves from 5,7% to 9,6% over the same period.
The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) caught the market by surprise when it cut the repo rate by 150 basis points on Thursday, as the consensus forecast was for a 100 basis points cut. In addition, the technical change of holding MPC meetings every second month meetings rather than the current quarterly interval, allows the financial market to hope for a more rapid decline in interest rates.
In his presentation before the MPC meeting, SARB money and capital market head Roelf du Plooy showed that the money market had priced in a 100 basis points cut at Thursday’s meeting, a further 100 basis points in September, then 100 basis points in November and a last 100 basis points in March 2004.
The September and November MPC meeting are now replaced by MPC meetings on
August 13 and 14, October 15 and 16 and December 10 and 11. The problem that the MPC faces is that inflation will fall faster than its willingness to cut interest rates. Even on the most aggressive interest rate forecast, the real rate is likely to remain above the October 2002 level until the end of next year or at least 18 months.
The boost to growth may take as long as eight quarters — in other words, the first quarter of 2005 — before the rate cut has an effect on output. – I-Net Bridge