The announcement on Friday morning that the South African Reserve Bank will convene a special monetary policy committee meeting on September 10 has caused consternation in South African financial markets, but left the capital market in no doubt that there will be an interest rate cut next week.
The short end of the market gained more than 20 basis points on speculation
that the committee will cut interest rates next week. The Reserve Bank statement merely said “major underlying trends in the economy required a more detailed review.”
At the beginning of the year the Reserve Bank had scheduled a committee meeting for September 10 and 11 as the thinking then was that a fortnight before the release of the Quarterly Bulletin, the committee would review the local economic data ahead of a rate decision.
This data was not available at the August committee meeting as the first estimate
of second-quarter growth was only released on August 26. In June, the Reserve Bank decided to change the frequency of the meetings to every even month, as the quarterly frequency put too much pressure on the Bank to cut even though it could call special committee meetings at any time.
The last two times the Bank convened special meetings — in October 2000
and January 2002 — the committee raised the repo rate.
“Given the precedent of the last two special … meetings, I will play devil’s advocate and say that the reason why the meeting was called was to dampen speculation of further rate cuts, as the economy is doing very well. They have repeatedly warned that administered price rises and wage increases are well above the 6% upper limit,” a London-based economist said.
“I agree with the capital market that the special committee meeting means a rate
cut next week. In my view that is wrong, as we can easily wait until the October
MPC meeting to cut interest rates,” Dawie Roodt, the economist at the Efficiency
Group, said.
“I think the announcement raises the prospect of perhaps a more aggressive
rate cut phase and the possibility of two rates cuts this year instead of
one. There is speculation of another rate cut next week,” commented George Glynos, market analyst at MMS International.
He said that announcement said that global and local economic conditions would be discussed. Given South Africa’s sluggish GDP growth, the announcement might signal a shift in policy, with the “stubbornly strong” rand being seen as a threat to future growth.
On August 26, Statistics South Africa’s first estimate of second quarter gross domestic product (GDP) growth was 1,1% seasonally adjusted and annualised
compared with growth of 1,5% in the first quarter. The median forecast for
the second quarter was 1,5%.
This was the fourth consecutive quarter that growth has slowed, but equally, it was the record nineteenth consecutive quarter that the economy has expanded. The real annualised economic growth rates during the four quarters of last year
were 3%, 3,8%, 2,9% and 2,4% respectively.
On a year-on-year basis Q2 2003 GDP was up 1,8% from Q1’s 2003 GDP rise of
2,5% year on year. The seasonally adjusted Investec South African Purchasing Managers Index released on Monday, confirmed that the local economy has turned the corner after a weak second quarter.
The index, which measures activity in the manufacturing sector, eased
to 50,3 from July’s 50,6 after the it had been below the key 50 level for all
three months of the second quarter.
The June and May readings were the lowest since the South African index was
first compiled in September 1999, which is also the start of the current
upswing in the South African economy.
The index is modelled on the Institute of Supply Management index of the US, which measures manufacturing activity. The break-even level is 50, so a
reading above 50 implies expanding manufacturing activity.
South Africa’s June leading economic indicator rose by 2,7% month on month after
a revised 1,1% month on month increase (previously 0,7% month on month increase) in May, data from the Reserve Bank showed last week.
This is the first time since April and May last year that the economic indicator has risen for two consecutive months. The June economic indicator is now at its highest level since December 2002.
The leading indicator may indicate that economic activity bottomed in April and there was an improvement from May onwards, especially as the interest rate cuts in June and in August would have boosted economic activity as already seen in new car sales.
In May there was still a year on year decline of 8,9% to 17 381 new car sales, but
this was replaced in June by a 4,7% year on year rise to 19 865 units. In July this rose
further to an 8,6% year on year gain to 22 986 and in August there was a 13% year on year increase to 22 979 units.
The recovery in economic activity is even evident in exports despite a generally stronger rand. South African exports registered their first consecutive three months above $3 billion in May, June and July of this year.
Monthly exports have only exceeded $3-billion ten times so far, but in
previous episodes, the move above $3-billion was followed by a decline to below
this level.
Exports soared by 27,6% year on year to $3,3-billion in July after a 16,1% increase
in US dollar terms in the first half of this year to $17 446-billion, while last year exports rose by only 1,5% to $29,9-billion.
Exports to non-Southern African Customs Union trading partners have
been on a declining trend in rand terms since they hit a record high of R32,13-billion in October last year — 11 months after the rand reached a record worst
level of R13,86 to the dollar on December 20 2001.
The government and the Reserve Bank have repeatedly warned that exporters should expect no relief from intervention or official comments to weaken the rand.
Most economists had expected the Reserve Bank to cut by a further 100 basis points at the next scheduled meeting of the Bank’s monetary policy committee
meeting on October 15 and 16.
In 1999, South Africa cut its prime rate eight times, from 23% in January to 15,5% in October. The Growth and Development Summit on June 7 aimed to halve unemployment over the next decade. Job creation will in part flow from an expanded public works programme that will provide the South African economy with the demand to prolong the current record expansion, which last May surpassed the previous record expansion between September 1961 and April 1965. — I-Net Bridge