/ 21 December 2005

Most economists expect no 2006 rate cut

The majority of economists expect no change in monetary policy in South Africa in 2006, but there are economists who are forecasting cuts, and those who are looking for increases.

A no-change scenario is what the majority of economists forecast for 2004 and 2005, after the South African Reserve Bank (SARB) cut interest rates by 550 basis points in 2003 after increasing them by 400 basis points in 2002.

At the end of 2002, economists had expected only 300 basis points’ worth of cuts in 2003 with a further 100 basis points cut in 2004.

The SARB surprised the markets by cutting by 50 basis points in August 2004 and by a further 50 basis points in April this year.

The market is divided, with the forward interest-rate market pricing in a 50 basis-point cut in the middle of 2006, while 83% of South African fund managers in the Merrill Lynch December 2005 survey expected the next move in the repo rate to be higher.

Some economists remain optimistic that a single-digit prime rate will be in place before the end of next year, with the most optimistic looking for a 9% prime compared with the current rate of 10,5%.

Some economists worry about the delayed impact of higher oil prices on inflation and point to the warning issued by the SARB’s monetary policy committee (MPC) in October as a reason for expecting higher interest rates next year.

The MPC said at the time that the risks to the inflation outlook have increased due to the high and volatile international crude oil price and will not be ignored.

“The increased risk of possible pass-through leading to pronounced second-round effects on CPIX inflation must inform policy going forward,” the MPC said.

“Although there is no conclusive evidence of pass-through at present, and the monetary policy committee has not judged it necessary to change the monetary policy stance at this meeting, these developments will be closely monitored,” it added.

In 1999, the median forecast of economists was that prime would return to the March 1998 low of 18,25%, which would be the bottom of the easing cycle.

Instead, the 1999/2001 easing cycle saw the prime rate bottom at 13%, 1 250 basis points below its September 1998 peak of 25,5%. — I-Net Bridge