Although the money market and capital markets are pricing in a 150 basis point cut on Thursday, Réjane Woodroffe, economist at Metropolitan Asset Managers, said the South African Reserve Bank’s monetary policy committee should err on the side of caution.
“The Reserve Bank would do well to be cautious of overly aggressive rate cuts, for the sake of its inflation targets,” Woodroffe said.
“While the rand has been strong, we cannot be certain how much longer it will remain at these levels,” Woodroffe commented.
In particular, Woodroffe was worried about the current account, which has moved into a deficit of 1,4% of gross domestic product (GDP) in the second quarter of 2003 compared with a surplus of 0,3% of GDP in 2002.
“Although the last quarterly bulletin indicated that strong portfolio flows were able to fund the deficit in the second quarter of the year, over the past two months these flows have swung negative. This, coupled with a deteriorating trade balance, means we can expect to see the current account deficit widen further towards year end,” Woodroffe said.
South Africa’s balance of payments surplus rose to a record quarterly amount of R22,529-billion in the second quarter of 2003 after registering a deficit of R5,449-billion in the first quarter of 2003 and a surplus of R1,922-billion in the fourth quarter of 2002.
South Africa had a surplus of R36,584-billion in 2002, the fourth consecutive annual surplus after a R7,219-billion surplus in 2001, a R5,114-billion surplus in 2000 and a R25,865-billion surplus in 1999.
“We expect interest rates to be cut by a further 100 basis points this year and another 50 basis points early next year depending on the behaviour of the currency. CPIX should reach 4% by year-end, coming in at an average around 6,5% for the year. It should average 5% for 2004, therefore coming well within the inflation targets,” Woodroffe said.
South Africa uses CPIX inflation (headline consumer inflation excluding mortgage costs) as the inflation target measure with the range for the annual average rate being 3% to 6%.
In 2000, the annual average CPIX was 7,8%, falling to 6,6% in 2001, but then rose to 9,3% in 2002. The average for the first eight months of this year was 8,05%, with August’s rate at 6,3% y/y after starting the year at 10% y/y.
Taking into account the balance of payment risks, Woodroffe believed the rand would settle at about R7,40 to the dollar by year-end. — I-Net Bridge