The National Treasury has over the past two weeks created space for the South African Reserve Bank to cut interest rates at the next monetary policy committee meeting on June 9 and 10.
One of the reasons for not cutting interest rates at the February and April MPC meetings was concern about the future course of oil prices.
Now that the Treasury has capped the domestic fuel price, this factor can no longer influence South African consumer inflation.
High international oil prices, however, mean that consumers in other countries will be diverting an increasing amount of funds to satisfy their fuel needs, so leaving less for other goods. As a result, other commodity prices, such as gold and platinum, have tumbled from their April highs, making an encouragement of domestic demand imperative given the slowdown in export demand.
The second major reason for not cutting interest rates was the significant gap between domestic demand and domestic production, which meant that import growth exceeded export growth. This would result in an increasing foreign trade deficit, which if one does not want the rand to weaken, means one needs foreign capital inflows to compensate for one’s trade deficit.
This the Treasury has done by borrowing $1-billion with repayment scheduled in only 10 years.
Two other events have helped sentiment towards South Africa and the rand. The first was the winning of the bid on May 15 to host the 2010 Soccer World Cup, while the second was President Thabo Mbeki’s State of the Nation speech on May 21, where he spelled out a detailed programme of what the government will do to encourage growth and control administered prices.
The result of the above was that the rand strengthened from a worst level of R7,15 per United States dollar on May 10 to a best level of R6,33 on June 2, the day the $1-billion arrived in South Africa.
This 13% gain in the rand, as well as a decline in the international oil price, has meant that the rand price of petrol has slumped by 15,2% from a peak of 256,065 cents a litre on May 20 to only 217,089 cents a litre on June 3, its lowest level since April 21. The over-recovery on the petrol price was 28,224 cents a litre on June 3.
However, despite the space created by the Treasury, the consensus forecast is that there will be no change in interest rates next week, as the world anticipates a US rate hike at the end of June.
The impact of the first US rate hike since 2000 is unknown and a cautious central bank is likely to wait to see the impact of this before using the space created by its partner in economic policy making. — I-Net Bridge