/ 25 June 2009

Cosatu: Reserve Bank ‘doesn’t care a damn’

The Congress of South African Trade Unions voiced anger on Thursday over a surprise central bank decision to keep interest rates on hold and said it would cost the country jobs.

Cosatu, which has threatened to strike if Reserve Bank Governor Tito Mboweni does not soften his monetary policy stance, said the bank’s decision to keep the repo rate at 7,5% was “unbelievable”.

“The Reserve Bank doesn’t care a damn about what happens to the economy, job creation,” Cosatu general secretary Zwelinzima Vavi said in a telephone interview.

“Everybody else in the world has reacted to the current crisis by slashing interest rates to 0% and 1%, South Africa is just bucking the trend, moving to the opposite direction. Very very angry, I must say.”

The central bank surprised markets by keeping its repo rate unchanged on concerns about stubbornly high inflation and signs an economic downturn may be nearing an end.

Cosatu and other unions want South Africa to scrap its policy of inflation targeting and to cut rates more aggressively to spur the economy, which has tipped into its first recession in 17 years, and safeguard jobs.

“It is disappointing, and the Reserve Bank is so conservative it is unbelievable,” Vavi said, adding the central bank was responsible for thousands of job losses this year.

“We know that we have very deep, deep differences with them and their approach, we think their approach has been very costly for South Africa’s economy.”

Solidarity union said in a statement keeping rates on hold “will only prolong the recession already plaguing the country”.

JSE weakens
The JSE closed down on Thursday, weighed by Monetary Policy Committee decision.

By 5pm, the JSE all-share index had weakened 1,05% with resources giving up 1,23%, but platinum counters added 1,06% and gold miners advanced 1,40%.

Banks edged 0,78% lower, with financials down 0,77% and industrials off 1%.

A local trader said: “The market was taken by surprise by Mr Mboweni’s decision to leave the interest rate unchanged. We lost ground immediately after that, despite a good Dow opening.

“The rate decision has strengthened the rand, and along with a bond rally, has weighed against equity markets,” the trader said.

Deputy governer Xolile Guma said on Thursday that the central bank had made the right decision and it would not have been appropriate to be more aggressive in loosening monetary policy

“This decision is entirely consistent with the process that has been set in motion,” he told the South African Broadcasting Corporation in an interview.

“We are very confident that we have made the correct decision. We agree the situation is difficult. I don’t think it would have been an appropriate response to be more aggressive than the committee has been. We have been very accommodating.”

Mboweni said fuel and electricity price increases posed risks to the inflation outlook, and inflation remained sticky, above the 3% to 6% band.

“We, as a committee, are still concerned that inflation remains stubbornly high and the rate of decline is very small,” he said.

“As a central bank, we would like to maintain the credibility of this institution … and the credibility is about maintaining inflation at low levels.”

Mboweni said while the economy continued to show signs of “distress”, there were indications that the downturn, both domestically and globally, may be nearing a turning point.

Targeted consumer inflation eased, but still stood at 8% in May, despite falling factory gate prices.

A massive annual jump in electricity costs, announced earlier in the day, and an expected big increase in fuel prices for next month may help to keep CPI outside the band for longer. Power prices are to rise by 31,3% next month.

CPI is only seen returning to the band in the second quarter of next year.

Government bonds extended losses after the announcement, with the yield on the 2010 bond up 29 basis points at 7,16% at 3pm GMT.

Only two of 26 economists polled by Reuters last week expected the no-change decision, with 24 predicting a 50 basis point drop.

But analysts admitted the price outlook had deteriorated, particularly given the massive electricity price increase.

“The point is that their mandate is to target inflation and contain inflation,” Karen Chow, economist at market analysts ETM said. “From here on, they’re unlikely to cut rates further unless we see some data showing significant deterioration in economic growth.”

Surprise decision
Mike Schussler, economist and director of Economists.co.za, said the decision had taken most people by surprise, “including myself”.

“It is perhaps an indication that most of the rate cuts are now behind us. It shows that perhaps the MPC is having second thoughts on fighting inflation and we can only hope that there might be a further cut in the second half. It’s obviously not good for money markets, and as many economists have already suspected, we may have approached the end of our cutting cycle,” Schussler said.

Doret Els, economist at Quantum Asset Management, said it was the right decision.
“If you look at the CPI figures released on Wednesday, they show that inflation is still sticky around 8%. Also private [sector] inflation expectation still points to inflation exceeding 6% up until 2011, and that is very dangerous.”

Adenaan Hardien, economist at Cadiz Asset Management, said: “While the MPC continues to see the domestic economy as very weak, it flagged increasing signs that things are stabilising. And while weak activity and a firmer rand remain positive for the Bank’s inflation outlook, the MPC also highlighted negative risks from cost-push pressures, particularly from electricity and other administered prices.

“The Bank now sees inflation falling back into the target by the second quarter of 2010 and remain in the target until the end of 2011.

“Today’s decision marks the end of the cutting cycle.”

Razia Khan, economist at Standard Chartered, said it was difficult to separate the political backdrop to the decision.

“Given union calls for more aggressive easing, the Reserve Bank would have been keen to assert its independence, demonstrating that price stability is their mandate.

“It is also possible to read in this an admission that with administered price increases contributing sizeably to the overall rise in CPI, the SARB alone cannot hope to control inflation fully. They can only react with the tools they have available to them. So electricity tariffs were increased. That would have to signal an end to the rate easing cycle for any inflation-targeting central bank. Point made.

“Although the decision is a negative for bonds, and a negative for equities, the ZAR should benefit from its continued yield attraction. The easing cycle will almost certainly pause — there is no meeting in July — but we would not dismiss a further cut in the repo entirely. For now, a further cut in the repo is not the central scenario, but the risk of renewed easing still lurks in the background.”

Absa said the decision was a “disappointment”.

The decision did not help “an already heavily-indebted household sector” struggling with debt repayments.

A lower mortgage rate would have further improved the affordability of housing over a wide front, said Luthando Vutula, managing executive of Absa Home Loans.

“A further cut in interest rates would have implied that mortgage repayments would have dropped by 26,3% since December last year when the mortgage rate was still 15,5%,” he added.

The monthly repayment on a R500 000 mortgage loan over a 20-year term would have dropped by another R169 if there had been a 50 basis interest rate cut, he said.

“This implies a cumulative monthly saving of R1 778 on a R500 000 mortgage loan since December last year.”

According to Vutula, the economy was expected to remain under “a lot of pressure” until late this year.

This would continue to affect employment, household income and the property market.

In view of these developments, he encouraged consumers to keep expenses under control and look for affordable properties.