The South African Chamber of Business (Sacob) on Tuesday called for a further 300 basis points cut in the prime interest rate by year-end to accelerate economic growth.
“Sacob calls for a further drop in interest rates before year-end to ease these monetary constraints and to bring real interest rates down to comparable levels with South Africa’s peer group of countries,” it said in commentary accompanying the release of the business confidence index (BCI), which rose to a record 112,3 in September from 110,9 in August.
“Sacob believes there is an opportunity to decrease interest rates by up to two percentage points at the next monetary policy committee meeting and possibly a further one percentage point at its December meeting. Sacob is further of the
opinion that the exchange rate for the rand is best determined by the market within a flexible exchange rate policy,” it added.
Sacob pointed out that before May 2003, the inflation rate was already slowing rapidly with consumer inflation easing to 7,8% y/y in May from a recent peak of 13% y/y in October, while using the South Africa Reserve Bank’s inflation target measure, CPIX, the decline was from 11,3% y/y in October to 7,7% y/y in May.
CPIX excludes the effects of mortgage rates from consumer inflation. The Reserve Bank’s target is for an annual average CPIX of between 3% and 6%.
Between October 2002 and May 2003, however, the nominal prime overdraft rate remained at 17%, with the result that the real prime overdraft rate increased from 4% to 9,2% if deflated by consumer inflation, and from 5,7% to 9,3% if deflated by CPIX.
Using the latest available consumer inflation data, which is for August, the current prime rate of 13,5% gives real prime rates of 8,4%, if deflated by consumer inflation, and 7,2%, if deflated by CPIX.
“In my opinion, the correct level for the real prime rate is between 4% and 5%, so the Reserve Bank is lagging the decline in inflation. It needs to catch up and do so before the developed countries starting increasing their interest rates again,” said Sacob economist Richard Downing.
“What I cannot understand is how economists can forecast an eight percentage point drop in the inflation rate, yet only forecast a four percentage point decline in prime. That means that the real prime rate goes up by four percentage points, which does not make sense given the need to accelerate our growth rate,” Downing said.
At the beginning of this year economists expected only a partial reversal of 2002’s four interest rate increases in 2003, with the majority seeing only three interest rate cuts in the year, with a further cut in 2004.
An I-Net Bridge survey of private sector economists resulted in a median of three cuts of 100 basis points each with a range from two cuts of 100 basis points each to six cuts of 100 basis points each.
The 2003 year-end nominal prime rate was therefore forecast at 14%, from 17% in 2002 and 13% in 2001.
The Reserve Bank has already exceeded the median target with 350 basis points worth of cuts between June and September, but would need to cut by 150 basis points at next week’s meeting and a further 100 basis points at the December meeting to meet the best forecast.
The money market is currently pricing in a 150 basis points cut next week and a 50 basis points cut in December.
“The greatest challenge still remains to accelerate economic growth, job retention and creation and in this respect the speedy implementation of the outcomes of the recent growth and development summit is an imperative,” Sacob concluded. — I-Net Bridge