All economists surveyed by I-Net Bridge expect no change in interest rates at the end of the two-day meeting of the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) meeting, which started at 9am on Wednesday.
This will be the ninth consecutive meeting at which the majority of economists have forecast no cut in rates, but in August 2004 and April 2005, the SARB did cut rates by 50 basis points.
The no-change forecast is despite the fact that CPIX inflation (headline inflation excluding mortgage costs) has been below the midpoint of the SARB’s inflation target range of 3% year-on-year (y/y) to 6% y/y for 16 out of the past 19 releases.
The exceptions were 5% y/y in June 2004, 4,8% y/y in February 2004 and 4,6% y/y in November 2004.
The latest available data is for April 2005 at 3,8% y/y, but economists forecast an easing in the June CPIX rate due to a 16c/l drop in retail petrol prices.
Bond traders are more optimistic and say that weak global growth and an easing in international oil prices may prompt a forward-looking central bank to cut interest rates now.
The yield on the R153 bond is at 7,51% compared with a prime rate of 10,5%.
The R153 has dropped by more than 50 basis points since June 1, when the
R153 touched 8,06%.
The recent volatility in the rand has concerned economists as the rand went from below R6 per dollar to almost touch R7 per dollar and then recover to the 6,60 level. The optimists say that all this has done is provide a buying opportunity for foreigners, who expect the rand to strengthen back towards the R6 per dollar level as the proceeds from the Barclays purchase of Absa enters South Africa.
The 16,3% move in the rand from a best level of 5,9750 per US dollar on May
9 to a worst level of 6,9538 on June 1 has spurred net foreign purchases of South African assets.
In the past two weeks, foreigners bought R5,783-billion worth of South African bonds and a net R2,958-billion worth of South African equities, compared with net purchases of only R1,018-billion of bonds and net sales of R479-million of equities in the prior two weeks.
The SARB boosted its buying of US dollars to add to its foreign reserves to $1,217-billion in May from only $156-million in April.
The SARB said the increase in reserves levels reflected a combination of foreign exchange operations conducted by the Reserve Bank for its own account as well as on behalf of customers, including foreign exchange purchases arising from a foreign direct investment (FDI) transaction.
The July 2004 foreign exchange reserves exceeded $10-billion for the first time and stood at $10,251-billion at the end of the month. At the end of May they were a record $15,535-billion. A total of $1,652-billion in gold reserves lifted total gross reserves to $17,187-billion at the end of May.
Last week President Thabo Mbeki said the rand’s value was basically determined by the market, and he said that remained the government’s policy.
“We certainly are not thinking in any way of finding huge resources to keep the value of the currency at a particular rate,” Mbeki said on June 1 while on a state visit to the United States.
The MPC meeting begins on Wednesday morning and ends on Thursday afternoon, as specialist presentations outline both the domestic and international environments.
These presentations are repeated to the media and then at 3pm local time on Thursday, SARB governor Tito Mboweni reads out the MPC statement live on SABC television, so that all market participants can receive the information at the same time. – I-Net Bridge