This week’s surprise 100-basis point-cut in the South African Reserve Bank (SARB) repurchase rate came against the background of optimism about prospects for the global economy, including an upbeat review by the International Monetary Fund (IMF).
In its twice-yearly Global Financial Stability Report, the IMF said that rockbottom interest rates and the ”remarkable resilience of financial markets” had left firms poised to invest.
The financial system had been ”severely tested” by the dotcom crash, but low borrowing costs had laid the foundation for recovery by helping corporations that were hit hard by the downturn to rebuild their finances, the IMF said in a positive assessment of the outlook for Wall Street and the City of London.
”The reduction of policy interest rates to post-war lows … has facilitated progress in restoring financial soundness,” the IMF report stated.
Policymakers on both sides of the Atlantic have been pinning their hopes on a pick-up in corporate investment to kick-start economic recovery, as anaemic growth puts the brakes on consumer spending.
However, the report, published in the run-up to the IMF and World Bank annual meetings in Dubai later this month, identified potential dangers to the market upturn. It suggested that central bankers might have to keep interest rates low for some time, while ”unambiguous signs of stronger growth are still lacking”.
Market analyst for MMS International George Glynos said the most recent growth domestic product figures for the United States, showing 3% growth for the second quarter, formed part of the background to the SARB’s repo rate cut.
The cut — immediately followed by a reduction in the prime rate of major banks to 13,5% — was decided at an unscheduled meeting of the Monetary Policy Committee on Wednesday. ”There are signs that global growth is picking up and could be pretty big through 2004,” said Glynos. ”The bank wants to synchronise domestic policy and the domestic economic cycle with those of our major trading partners.”
In addition, inflation and interest rates remained ”subdued” in the US, Europe and Japan, giving the bank room to manoeuvre.
Turning to the domestic factors that prompted the rate-cut decision, Glynos said a continuing ”disinflationary” trend had been coupled with poor recent growth figures. Second-quarter growth came in at 1,1%, against expectations of 1,7%. He added that the rand had been far more buoyant than expected.
”By now we had foreseen an exchange rate of R7,60 or R7,70. In fact, it’s sitting at R7,38.”
The rand weakened to 7,44% this week on indications of a more aggressive Reserve Bank stance on rate-cutting. However, it bounced back after the announcement, suggesting market relief at the scale of the cut. Glynos said he believed there could still be one further rate cut by the end of the year, with the possibility of a second.
Reserve Bank governor Tito Mboweni also emphasised that there was significant unused capacity in the manufacturing sector.
Speaking to the media after the MPC meeting, he said South Africa was well on course towards the 3%-to-6% inflation target.
While there were signs that the international economy was beginning to recover from an extended period of low growth, activity in the South African economy was slowing.
Year on year, manufacturing output had fallen by 1,5%. Mboweni warned that the bank would not hesitate to take remedial action if the inflation picture deteriorated.
Additional reporting by Heather Stewart of the Guardian.