If the Reserve Bank believes it has conquered inflation and is more concerned about socio-political holy grails of growth and employment, it should cut interest rates next week, according to Mandla Maleka, chief economist at Eskom Treasury.
This in a week when French idiosyncrasies wreaked havoc on local currency, consumer spending remained robust, poor manufacturing growth presented itself as a compelling reason for a cut, and the rand mitigated against a further easing of interest rates.
Maleka notes that while rand weakening may be of concern for inflation, it is a short-term phenomenon because it is a “dollar story”. He argues that this week, for instance, the dollar took strength from “the politically unpalatable” implications of the French “no vote” in its European constitution referendum.
He says if the United States continues to raise interest rates it will reach a “neutral” territory of 3,75% to 4% by year end, at which point, a further raise will be seen to strangle growth and the dollar will weaken, which in turn strengthens the rand. Maleka says that, on purely economic terms, short-term rand depreciation makes a cut unlikely.
Reserve Bank Governor Tito Mboweni has certainly shown his awareness of socio-economic realities. At Monetary Policy Committee meetings in the past two years, he has pointed to spare capacity in manufacturing as a source of comfort, a sign that inflation is not under threat. At the last meeting in April, he pointed out that underused capacity was worryingly “slackening”.
This week, gross domestic product figures from Statistics South Africa showed that the economy grew by 3,8% during the first quarter compared with the same period last year.
More importantly, manufacturing shrunk by 1,9% in the first quarter, after growing by 2,5% in the last quarter of last year. Maleka saw this, together with the rest of the export and import-competing sectors, as another reason to cut.
However, Nazmeera Moolla of Merrill Lynch believes the rand is the primary driver of rates and that, at this week’s exchange rate, they should remain steady for the year.
On Wednesday the rand slipped to R6,90 against the dollar from R5,80 earlier in May. It also fell from R7,80 against the Euro on Monday to R8,40. On a trade weighted basis, it reached its worst level since May last year.
Apart from the rand, conditions point to a cut unless Mboweni places undue consideration on credit growth. On Monday Reserve Bank figures showed that M3 money supply grew by 13,91%, while private sector credit extension grew by almost 20%.
But oil prices, the key threat to inflation, have stayed below $50 a barrel since the last cut in April. At that meeting, Mboweni looked as though he had painted himself into a corner by holding rates in October and February, but then he cut when it seemed more difficult. If he remains brave, he should cut rates next week.