Interest rates cut on the cards?

2010-11-17 13:05

Economists are split on whether the Reserve Bank’s governor Gill Marcus will deliver an early Christmas present to the economy by trimming interest rates.

The Reserve Bank’s monetary policy committee (MPC) started meeting today and the verdict on the rates will be given tomorrow.

If the MPC cuts interest rates by 50 basis points, this would result in the prime lending rate – the rate at which private banks lend to consumers – reaching 9%, the lowest level in more than 30 years, according to Nedbank senior economist Nicky Weimar.

Over the past two years, the MPC has slashed the repo rate – the rate at which the central bank lends to commercial banks – by six percentage points and it now hovers at 6%.

“We believe the rates will be cut because inflation appears to be well contained in the short to medium term, and the outlook for the next 18 months is still very subdued and well within the central bank’s 3% to 6% target range,” said Weimar.

He said the economic recovery was still slow and patchy, with underlying consumer and business confidence still fragile.

“There are also signs that the economy lost momentum in the third quarter,” said Weimar.

“Manufacturing production slowed sharply partly due to the protracted strike in the broader automotive industry, but also to a noticeable loss of momentum in the world economy, which does not bode well for exports and growth in 2011.

“Retail sales also slowed significantly in August as the impact of the World Cup disappeared from the figures, while the demand for credit remain modest and the economy continued to shed jobs up to the end of the third quarter despite four consecutive quarters of economic growth,” he said.

Industrial Development Corporation chief economist Lumkile Mondi expressed a more radical view.

“The market has already factored in a 50 basis points rates cut, but I believe the MPC could do better by cutting by 100 basis points,” said Mondi.

“This is because finance minister Pravin Gordhan has been talking about the relaxation of exchange controls and the economy is not picking up speed as we had expected it to,” said Mondi.

He said he does not believe a cut in interest rates would spur the consumers to rush to spend a lot of their money on shopping during the festive season.

“The consumers are still highly indebted (with indebtedness levels sitting at 78%) and it is very unlikely that an interest rate cut would result in them carrying out a lot of shopping,” said Mondi.

Econometrix economist Tony Twine said he would have preferred for the interest rates to be left untouched.

“Though there are many positive signs that show that the MPC could cut the interest rates, I think they should just be left alone,” said Twine.

“Cutting the interest rates by 50 basis points would have a minimal impact on the real economy and could result in the MPC raising the interest rates quicker than expected next year,” he said.

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