After slashing interest rates by a merry-making 5% for the year, Reserve Bank Governor Tito Mboweni took the fizz out of the good times with a meagre 0,5% rate cut on Thursday, bringing the repo rate to 8%.
This is against a market expectation of a cut of at least one percent, with some analysts calling for a 1,5% cut.
In the wake of the decision, the rand strengthened by more than 10c from R6,42 to R6,29. The Top 40 Index immediately dropped 100 points to 8826.
Mboweni described the bank’s outlook for inflation as “promising”. CPIX, or inflation minus mortgage rates, had fallen from 11,3% in October last year to its current level of 4,4%.
Although the bank expected inflation to stay within the range for the next year, Mboweni warned, and restated for emphasis, that inflation pressures would build up towards 2005.
This was because throughout next year the economy would experience increased final demand, as consumers continued to spend their additional disposable income. Final demand for the first nine months of this year grew by 4%.
The latest rate cut also brought into focus the position of the Reserve Bank relative to its peers around the globe.
Central banks in Australia and England have already hiked interest rates, suggesting the start of an upward cycle in rates around the world. This is especially true if, as expected, the United States also raises interest rates from June onwards.
Rising rates in other countries narrow the rate differential, a huge contributor to capital inflows.
This may explain the comment of George Glynos, market analyst at Econometrix Treasury Management: “I worry that the Reserve Bank is going to be caught behind the interest cycle.”
Glynos suggested that the bank was cautious in its anticipation of strong global growth next year. Commenting that he found the size of the cut “disappointing”, he said he expected another of 0,5% in February.
Jac Laubscher, group economist at Sanlam, was “quite pleased with the cut”, as he had expected no reduction at all. He said he thought the bank had been deterred by the inflationary pressures it anticipated for 2005.
Mboweni expressed concern about inflationary expectations. According to a survey by the Bureau for Economic Research at the University of Stellensbosch, released on Thursday, the public expects inflation to average 6,4 % in 2004 and 6,7% in 2005.
Tradek economist Mike Schussler said more cuts were likely in the months ahead, even though Mboweni denied the possibility.
Another source of pressure on inflation is household debt. Although the broadly defined M3 money supply grew by 5,1 % in August — its lowest level in 10 years — growth in household debt has consistently exceeded 10 %.
The rate cuts appear to be trickling down to the strangled manufacturing sector. The Standard Bank Sacob Trade Activity Index stood at 54,1 in November, up from from 48,7 in September.
Additional reporting by I-Net Bridge