High hopes for big rates cut

2009-05-27 22:45

Johannesburg - The case for cutting by 150 basis points on Thursday rests on the collapse of the economy in the first quarter. The 350 basis points cuts since December have failed to revive the South African economy, economic consultancy Forecaster Ecosa said on Wednesday.

"Although we acknowledge that consumer inflation is sticky and has remained above 8% year-on-year in April, we believe that consumers and businesses will adapt to the output gap and put pressure on suppliers to reduce prices to well within the inflation target range.

"We are already seeing this in the building cost inflation data, which slowed to just 1.4% in the first quarter from 6.3% in the fourth quarter, while we believe that April's producer inflation will be near, if not below, the bottom end of the inflation target range," the economic consultancy told I-Net Bridge.

Inflation remained sticky at levels above the Reserve Bank's 3% to 6% target range in April, falling marginally to 8.4% from 8.5% in March, figures released by Statistics SA on Wednesday showed.

Inflation broke through the Reserve Bank's target range in April 2007. Driven by high food, fuel and electricity prices, it hit a peak of 13.6% in August before falling sharply as fuel prices dropped. However, the fall was not as fast as the Reserve Bank had hoped, with inflation in the first quarter of 2009 exceeding its forecasts by a significant margin.

But, as Greta Steyn reports, economists think the Reserve Bank would be more worried by the dire gross domestic product (GDP) figures released earlier this week than the stickiness of the inflation rate. Tuesday's GDP figures showed a shocking 6.4% plunge in the first quarter of this year, after a 1.8% fall in the fourth quarter of 2008.

The two consecutive quarters of negative growth mean the SA economy is now in its first recession in 17 years. The fall in GDP was the worst quarterly drop in 25 years.

Absa economist Ian Marsberg said at this stage inflation was less of a worry than GDP. He expected the Reserve Bank to cut interest rates by a full 100 basis points this week.

"At the discussion of the monetary policy committee (MPC), GDP concerns will override inflation. But we are getting to the point where in future the Reserve Bank will have less room to manoeuvre," Marsberg said.

The Reserve Bank has cut interest rates by 350 basis points since December, bringing the prime overdraft rate to 12%. The bank meets on Wednesday and Thursday to discuss its next interest rate move, with the decision to be announced at 15:00 on Thursday.

ETM economist George Glynos agreed that the latest inflation figure, though marginally worse than expected, would not prevent the bank from cutting by 100 basis points.

'Rand boost to benefit SA'

"Worrying about inflation over the next three to six months is pointless. The bank is concerned with the medium-term outlook, and is looking ahead at next year," said Glynos.

"The medium-term inflation trajectory remains favourable. We expect inflation to enter the target range in the second quarter of next year. With the weak GDP both domestically and locally, the bank has ample justification for a 100 basis point cut in interest rates."

He said both the rand's current strength and overseas deflation would benefit SA's inflation rate in future.

Standard Bank economist Danelee van Dyk believed the bank would only cut by 50 basis points this week, as the "relative rigidity" in the inflation rate wasn't welcome. She said the inflation profile was a little disappointing. However, she acknowledged that GDP figures heightened the chance that the bank might cut by 100 basis points.

In its last MPC statement, the Reserve Bank dropped the reference to inflation falling back into the target range in the third quarter of this year.

When the bank's monetary policy review came out earlier in May, it seemed to suggest that the bank only expected inflation to fall below 6% in the fourth quarter of 2010.

The bank expected inflation to average 5.4% in the fourth quarter of 2010. It saw threats to inflation from administered prices, such as municipal assessment rates and electricity (Eskom has applied for an "interim" tariff increase of 34%.) But it said the rand's recent stronger levels would help the inflation picture.

The last MPC statement emphasised the gloomy economic environment, such as declines in output and consumption expenditure.- Fin24.com and I-Net Bridge

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