In a replay of expectations for the June South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) meeting, most South African economists expect a 100 basis points cut, but equally, many are hoping for more when the MPC makes its decision known on August 14.
At the June 12 MPC meeting, the SARB pleased the market by cutting by the hoped-for 150 basis points, rather than the expected 100 basis points. The reasoning behind a repeat at the August meeting is due to the significant downward revision to consumer inflation data announced on May 30.
Prior to the revision, the money market had priced in a 100 basis points cut at the June MPC, but the revision meant that inflation was almost 200 basis points lower than when that forecast was made. The reasoning is that the “theoretical” 300 basis points cut would be split over the June and August MPC meetings and the SARB would then revert back to cutting by 100 basis points at the October and December meetings.
The effect of the revision was to lower the March CPIX inflation rate to 9,3% y/y from a previous 11,2% y/y. CPIX is the headline consumer inflation excluding the effects of mortgage rates. The SARB target is an annual average of 3% to 6%. Most economists believe CPIX will move within the range in July, as the June reading was only 6,4% y/y from 8,5% y/y in April and 7,7% y/y in May.
The MPC meeting takes place over two days on Wednesday and Thursday, August 13 and 14, as both the domestic and international environments are discussed after presentations by specialists.
These presentations are repeated to the media and then at 15:10 local time on Thursday, SARB governor Tito Mboweni reads out the MPC statement live on SABC television, so that all market participants can receive the information at the same time.
Before the June 2003 cut, the MPC last cut in September 2001, when the monthly average exchange rate was R8,6359/$. The MPC move then meant that the prime rate dropped to 13%, but four interest rate hikes last year saw the prime rate at 17% for the first half of this year.
The 400 basis point increase in 2002 was in response to the collapse of the rand from R9,79/$ on November 29, 2001, to R13,86/$ on December 20 2001.
The rand then reversed course and was the best performing currency against the dollar in 2002. The rand has continued to gain against the dollar this year and reached a best level of R7,05/$ on April 30. In June the rand averaged R7,87/$. The rand strengthened to an average R7,53/$ in July and the average so far in August is R7,40/$. The rand is currently trading near R7,20/$.
Some companies have reported that the strong rand is starting to hurt their export earnings, but they are likely to receive little sympathy from the SARB, as there are a multitude of hedging instruments available to protect against foreign currency fluctuations.
On Wednesday, SARB governor Tito Mboweni said it was significant that the rand strengthened after the June rate cut, as the rand was trading at R8,0650/$ on June 12 prior to the rate cut announcement. The rand has strengthened since he made those remarks.
Mboweni mentioned seven factors that would lead to sustained lower inflation, technically known as disinflation. These factors were lower food inflation, lower producer inflation, a low international inflation environment due to weak global growth, low levels of capacity utilisation, responsible fiscal policy, lower money supply growth and the continued recovery of the rand.
The main risk factor was a rise in unit labour costs, which businesses had to pass on to consumers in order to remain in business.
“Our concern is that wage settlements tend to be backward-looking, particularly in the case of multi-year agreements. Wage increases that are consistently above the actual inflation rate constrain the downward movement of inflation. The bank would like to see wages and prices being set in a forward- looking manner, on the basis of the inflation rate that is expected to prevail over the period for which wages are being set. This will not only ensure a faster decline in inflation, but also a lower cost in terms of output and employment,” Mboweni said.
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.
The consensus forecasts of economists in January 1999 was that the SARB would only cut five times and the bottom of the cycle would see the prime rate return to the March 1998 low of 18,25%.
In 1999, the consumer inflation rate dipped to 1,7% y/y in October and averaged 5,2% even though private sector wages rose by 9,3%. Unit labour costs only rose by 2,7% as labour productivity surged by 4,2%. The optimists expect a repeat of this scenario in 2003. – I-Net Bridge