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Rate cut 'unlikely' before June
16/01/2003 15:31 - (SA)
Helmo Preuss
Johannesburg - The South African Reserve Bank
(SARB) is unlikely to cut interest rates before its June Monetary Policy Committee (MPC) meeting. This is because it will not be swayed by market rumours or by the rand's recent performance, which, in any event, took a turn for the worse recently, Standard Bank says in its latest market forecast.
"Monetary policy under inflation targeting, rather than being driven by short-term events, responds to the long-term impact that such events are expected to have on inflation," economists Monica Ambrosi and Goolam Ballim write.
"While it is true that appreciation in the rand is tantamount to passive tightening in monetary policy, unless the MPC members believe the rand can sustain its current trading levels or better them during the course of the year, causing inflation to fall more precipitously within target range than thus far estimated, an interest rate cut is not impending," they say.
Standard Bank's view therefore is that while at least three interest rate cuts are expected this year, the first is only likely to come in June.
The rand remains immensely volatile, moving up and down by as much as 30c against the dollar on an intra-day basis.
"Headwinds, in the form of current account deficits and fickle portfolio investment inflows, could easily counter the support given to the rand by the healthy carry-trade. Moreover, a reversal in exporter/importer leads and lags in the currency market could cause the rand to relapse rather swiftly. And
the prospect of Telkom's privatisation being realised by the end of March is expected to lend little, if any, support to the currency. Also, any support is more likely to come in the form of improved sentiment rather than capital inflows, which will be absorbed by the SARB.
"The uptick in the oil price over the past six weeks, on the back of supply constraints caused by strikes in Venezuela (the third-largest Opec producer), has begun rattling the nerves. So much so, that the imminent outbreak of war in the Middle East could see the price of crude oil spike towards, if not beyond,
the $40 per barrel level.
"It would appear that measures are being taken to cushion the impact of such an eventuality. These entail, so far, the temporary introduction of an Equalisation Fund levy that has been included in the prices of petrol, diesel and paraffin. This means that funds accumulated in this kitty could reduce the extent of possible future price increases. And even if there are to be fuel price increases in the near future, coupled with vehicle price increases (albeit milder than last year's), the transport component does not pose an inordinate threat to the disinflation trend expected, notwithstanding its 15.3%
weighting in the CPIX index.
"Rather, more important, will be the expected abatement of food price pressures, given their 26% weighting within the CPIX index and the rapid rate at which they rose last year. While some threats to food prices still remain - the heat wave currently sweeping over the country could affect crops, while regional famine may also put pressure on the supply of staple crops - the
outlook for milder food price inflation this year is positive."
In total, Standard Bank's main scenario envisages three interest rate cuts this year of 100 basis points each in June, September and November respectively. It also incorporates scope for a further two similar interest rate cuts in 2004, around March and September.
The next most likely scenario envisages a faster reduction in
interest rates, subject to the rand exchange rate continuing to notch up gains and demonstrating less volatility.
Under a stronger currency, inflation could plunge much faster than expected, enabling the SARB not only to cut interest rates sooner, but also to relax monetary policy by as much as 400 basis points during the course of the year.
The third scenario is included to portray what a bearish monetary policy scenario might look like.
In the event that the rand should resume a more precipitous depreciating trend, the SARB is expected to proactively counter the likely feed through to domestic inflation by hiking interest rates by 200 basis points.
A more aggressive move is envisaged because of the advantage of
hindsight provided by the events that unfolded in 2002. Such aggressiveness would nip in the bud the escalation of inflation expectations and enable the disinflationary trend to continue even if at a mildly slower pace. - I-Net Bridge
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