MPC meeting outcome not 'cut and dried'

The outcome of the South African Reserve Bank Monetary Policy Committee meeting, which got underway on Wednesday, is not “cut and dried”, according to Sanlam Investment Management economist Arthur Kamp.

A further increase in inflation expectations, as measured by the Bureau for Economic Reserach inflation expectations survey, could, for example, prompt the bank to err on the side of caution, he said.

“On balance, however, recent economic developments, including aggressive interest rate cuts from central banks around the globe, have presented an opportunity to bring South African interest rate cuts forward.

“After all, if it is clear that interest rates should come down, why not get going? Given a forecast return to the inflation target range in the latter half of 2009, we expect the bank’s repo rate to decline by a cumulative 300bp over the next year.

“A start with 50bp this week appears justified,” Kamp said.

“An expectedly sharp slowdown in the advance in consumer price inflation through 2009 in tandem with clear evidence of a material downturn in private domestic demand and credit extension unambiguously point to lower interest rates,” he added.

“The depreciation of the currency through this year may pose some risk to the inflation outlook, but the combined impact of sharply lower commodity prices and the favourable impact of Statistics South Africa’s consumer price index re-weighting and re-basing exercise in January should boost confidence in forecasts for markedly lower inflation in 2009.

“Meanwhile, final consumption expenditure by households fell at an annualised 0,8% in real terms in the third quarter of this year as real income growth slowed and the cumulative impact of previous interest rate hikes continued to bite.

“This palpably weak household consumption demand should help constrain price increases,” Kamp added.—I-Net Bridge

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