Rate cut on the cards?

As South Africa’s real interest rate climbs, many economists anticipate that the South African Reserve Bank will cut rates to boost growth and save jobs. This will provide some relief for indebted households and will please manufacturers, exporters and labour unions.

A strong rand, rising real incomes and slowing inflation may give the consumer breathing room, despite the upside risk of the sustained high electricity price, according to Stanlib economist Kevin Lings. The rand is being supported by massive foreign inflows into the South African bond market.

Lings revealed that producer prices have also contributed to making a case for a rate cut. Although the producer inflation (PPI) rose 7,7% compared with July last year, it was well below market expectations of an 8,6% increase. This despite the fact that this rate remains elevated, hurt by base effects.

“Agricultural inflation rose in July and there has emerged some concern about an upward drift in international food prices which, if sustained, could translate into a general upward bias in South African food prices off a very low base,” Lings cautioned. Although PPI inflation is expected to move higher in late 2010 and early 2011, Lings believes that many companies will absorb some of these higher costs through margin compression.

A window of opportunity
“A number of factors have changed since the last Reserve Bank MPC [monetary policy] meeting in July,” says Lings. “Globally, inflation remains well under control with almost no sign of any upward pressure in prices [except perhaps for food inflation]. The risk of deflation in the developed economies has increased. Indicators of global growth have weakened, especially in the US and Japan. Locally, the economy has experienced mixed data. Retail sales and manufacturing activity have moved noticeably higher, consumer income has risen appreciably, house prices continue to recovery, car sales remain robust and confidence levels remain elevated.”

Lings believes that the Reserve Bank will use this “window of opportunity” to cut rates by 50 basis points in September. “This will clearly be a close call, as some people on the MPC will, undoubtedly, argue that rates have already been cut substantially and that the economy does not require further stimulus,” Lings says.

“Furthermore, while inflation is currently in the ‘sweet spot’, there are some upside risks that should not be ignored. Crucially, irrespective of the interest-rate decision in early September, it is clear that domestic interest rates are unlikely to rise for an extended period of time.”

In effect, the South African consumer’s balance sheet has improved, given the very moderate growth in credit, a pick-up in equity prices since first quarter 2009, and an improvement in house prices. Consumers that are employed are better off — incomes are rising above inflation, interest rates falling, pension values rising and house prices rising. However, fewer people are employed and the country can ill afford more job losses and social pressures that may follow.

With all eyes on the government, which says it cannot afford the increases demanded by striking workers, much hangs in the balance. But for now, statistics appear to favour a possible rate cut, which would be good news indeed for South Africans.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

We make it make sense

If this story helped you navigate your world, subscribe to the M&G today for just R30 for the first three months

Subscribers get access to all our best journalism, subscriber-only newsletters, events and a weekly cryptic crossword.”

Related stories

WELCOME TO YOUR M&G

Already a subscriber? Sign in here

Advertising

Latest stories

DRC: To restore security, address impunity for rights violations in...

Diplomatic and military action alone will not solve the problem of violence against civilians

Chile’s lithium a poisoned chalice

It provides profit to billionaires but exhausts the land and its people

World Lion Day: Five young lions rescued in Romania arrive...

The country’s captive lion population of 9 000 is three times the size of the wild lion population.

Marikana lawsuits to be finalised by end of August

The state has already paid out R170-million in claims following the August 2012 massacre
Advertising

press releases

Loading latest Press Releases…
×