Although the consensus view among economists and financial-market participants is that interest rates in South Africa will rise in the second half of 2004 in reaction to expected higher inflation, there is a case to be made for the possibility of the next move in interest rates being down rather than up, according to Sanlam Group economist Jac Laubscher.
Speaking at a media presentation on Wednesday, Laubscher argued that several factors point to no interest rate moves by the South African Reserve Bank (SARB) in 2004, and a possible cut in rates by mid-2005. These include a smaller-than-expected impact of oil price rises on local inflation; a peak in the global and local economic growth cycles by mid-2005; relatively sluggish domestic growth in 2004; and the SARB’s own forecast of inflation remaining below the 6% upper band of the inflation target through 2005/06.
He did note that there is a chance that CPIX (headline consumer inflation less mortgage costs, used by the SARB in its inflation targeting policy) could move slightly above the 6% level in June this year, but only for the month, due to the combined factors of a very low base in June 2003 (-0,4%) and the likelihood of a hefty petrol price hike during the month.
Although this will call the SARB’s inflation target into question, he believed that, due to its temporary nature, the SARB will be flexible enough to cite its “explanation clause” and avoid hiking interest rates in response.
“Should the SARB’s monetary policy committee in the next 12 months or so feel confident that the structural downward move in inflation will be maintained, it could well decide that it would be appropriate to lower real interest rates in South Africa as they remain high relative to other emerging market economies,” he observed.
Laubscher also pointed out that, after 2003’s subdued economic growth of about 2%, the prospects for faster economic growth in 2004 and 2005 are not exciting, forecasting 2004 growth of between 2,5% and 3%, and 2005 growth of up to 3,5%. A major influence on this is the global business cycle, which is likely to peak in mid-2005 and thereafter lose momentum.
Risks to his growth forecasts included sharp oil-price rises or other global shocks, and a deterioration in the current account, which would not be easy to finance. The anticipated narrowing of the interest-rate differential between the United States and South Africa is not likely to place much downward pressure on the rand, he believed, as there is little evidence of such positions (shorting the US dollar) being held.
Going forward, he expected that although a weaker rand will aid the export of manufactured goods, the potential positive impact of this will be muted by the fall in dollar commodity prices.
He cautioned that the government may be losing patience with the apparent incapability of the private sector to enhance the growth rate of the economy. As a result, it appears as if the government wants to play a more active role in the economy in coming years, both as a supplier of goods and services and as the ultimate power determining the business environment for industry. However, he cautioned against a too heavy-handed approach to industrial policy, as it would restrict entrepreneurial initiative.
Commenting on inflation, Laubscher said: “There is no doubt that the inflation rate has bottomed and is set to rise from current levels. The risks to inflation are, however, of such a nature that they could well be contained, and they have the potential to change rapidly.
“Although the current upward pressure on oil prices holds the risk of rising interest rates in the short term, it could turn around rapidly should the security situation in the Middle East improve. It is also possible that a negative turn in fuel prices could largely be compensated for by a positive turn in medical inflation should government succeed in forcing medicine prices down.
“Wage increases could be moderated by the threat to employment posed by the current pressure on profits, and its impact on unit labour cost could be offset to some extent by increasing productivity.”
He expected food inflation to be tempered by the recent improvement in weather conditions and the positive impact that this has had on crop expectations. A moderate depreciation in the value of the rand should also not cause severe inflationary pressures, as its fall to less than R7 per US dollar is probably not reflected in lower prices in general.
“We remain of the opinion that CPIX inflation will move into the upper end of the 3% to 6% target range under the inflation-targeting regime later in 2004. The risk of a brief spell of above 6% inflation cannot be ruled out, but the medium-term outlook is for trend inflation to be between 5% and 6%.” — I-Net Bridge