No more rate cuts, says research bureau

There will not be any further interest rate reductions in the forseeable future, the Bureau for Economic Research (BER) said on Tuesday.

This was In light of recent double-digit wage settlements in a number of sectors and indications that the worst of the domestic recession might have passed, the bureau’s economist Hugo Pienaar said in a statement on economic prospects for the third quarter of 2009.

After reducing the repo rate by a cumulative 450 basis points between December 2008 and May 2009, the South African Reserve Bank’s Monetary Policy Committee (MPC) decided to keep the interest rate unchanged at 7,5% in June.

“The June rate decision can be interpreted as a pause in the rate cycle in order to give the MPC an opportunity to gauge the impact of the rate cuts [which work with a lag] already implemented.

“An alternative interpretation is that we have reached the end of the monetary easing cycle, ie. the repo rate will remain unchanged at 7,5% for the foreseeable future.”

The bureau remained concerned, especially owing to the potential for further sharp job losses, about the prospects for consumer spending.

“If household outlays continue to deteriorate and inflation slows faster than expected, there is a strong possibility that the South African Reserve Bank could cut the repo rate further later in 2009.

“In any event, we do not foresee interest rate increases for at least the next 12 months.”

In line with the Reserve Bank’s latest inflation projection, the bureau’s forecast suggested CPI would remain above six percent through February 2010, with a sustained fall below six percent only forecast from the second quarter of 2010.

“The BER projects that CPI inflation will average 7,4% during 2009 before easing to an average of 5,8% in 2010.”

The strength of the rand exchange rate and recent fall in the oil price back towards $60 a barrel, if sustained, boded well for domestic fuel prices.

“Indications are that the petrol price could decline by more than 20 cents per litre in the beginning of August.”

The 2009 forecast made provision for Eskom’s recently announced 31,3% electricity tariff hike.

South Africa’s economy would experience its worst contraction since 1992.

A return to mild, positive gross domestic product growth was expected from the third quarter, but the economy was forecast to contract by 2% during 2009. “Fairly muted” growth of 2,7% was projected for 2010.—Sapa

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