No in­ter­est rate cut (yet, if at all)

Weekend Witness - - Scene Around - DR CEES BRUGGE­MANS

THE Re­serve Bank may not cut in­ter­est rates again in mid-July. Re­gard­ing Septem­ber or Novem­ber, it de­pends on events, es­pe­cially sur­prises that move goal­posts.

There are three crit­i­cal fea­tures vis­i­bly in­flu­enc­ing the in­ter­est rate de­ci­sion: • in­fla­tion per­for­mance and out­look; • the econ­omy’s growth per­for­mance and out­put gap; and • any ap­par­ent risks to these con­di­tions.

Per­haps less vis­i­ble are po­lit­i­cal con­sid­er­a­tions, with es­pe­cially pol­icy trans­parency and gen­eral buy-in pre­sum­ably im­por­tant, aim­ing to ease the bank’s task.

In com­ing months, in­fla­tion should reach a cycli­cal low of four per­cent to 4,5%, mov­ing back to 4,5% to six per­cent in 2011-2012.

The main rea­sons for the ex­pected in­fla­tion re­bound are ex­ces­sive govern­ment tar­iff in­creases and wage de­mands keep­ing unit cost growth high even af­ter pro­duc­tiv­ity gains and job losses. Dis­in­fla­tion­ary food costs could lose vigour.

Thus the in­fla­tion out­look is com­fort­able in the short term, but al­ready less so when look­ing for­ward.

This in­fla­tion out­look of­fers few com­pelling rea­sons to cut in­ter­est rates fur­ther.

The econ­omy is nearly a year into re­cov­ery, with its pace so far quite lively. The main rea­son is the re­bound from deep ex­port, in­ven­tory and elec­tric­ity hits.

At some point global re­cov­ery will again cause a com­mod­ity price resur­gence, in oil but also food, the lat­ter also in­flu­enced by weather. When it does it will add to our in­fla­tion mo­men­tum. So far this isn’t on the radar screen but al­ways be ready for such res­ur­rec­tion.

The world econ­omy is not ex­pected to re­lapse into re­ces­sion.

Still, the cur­rent Euro­pean sov­er­eign-debtcum-bank­ing cri­sis holds con­sid­er­able po­ten­tial for dis­rup­tion.

All lev­els of pol­i­cy­mak­ing (Gill Mar­cus, Pravin Gord­han, Trevor Manuel) have pub­licly fin­gered this risk, for our ex­ports and also for cap­i­tal flows. For the du­ra­tion of such un­cer­tainty, ex­pect pol­icy pre­fer­ring to sit tight as it did in May. But what about post-cri­sis? For re­al­ists this is cur­rently a bridge too far, as they fear im­me­di­ate risks and are un­will­ing to call their res­o­lu­tion or tim­ing. But such a moment will come, for good or evil.

If evil (re­plays of 2008 or 1998-type con­ta­gions), it might re­quire emer­gency in­ter­est rate in­creases to pre­serve sta­bil­ity if the rand were to fall away heav­ily (there­after quickly un­done once the emer­gency passes?).

But if the worst does not hap­pen and global risk ap­petite re­asserts along with a weaker dol­lar post-cri­sis, South Africa may­well again ben­e­fit from ris­ing ex­port prices and heavy cap­i­tal in­flows fur­ther firm­ing the rand.

This could even yield pos­i­tive in­fla­tion sur­prises. If growth were still to be un­der­per­form­ing, it could cre­ate the po­ten­tial for an­other rate cut. Our mar­kets give this a 20% prob­a­bil­ity in the sec­ond half of 2010 (low but not neg­li­gi­ble).

Other emerg­ing coun­tries are al­ready nor­mal­is­ing rate poli­cies. In con­trast, in South Africa our re­cov­ery is yet to im­press and in­fla­tion could be more be­nign than ex­pected.

Our in­ter­est rates should also be low for long well into 2011, shad­ow­ing the Fed, the Euro­pean Cen­tral Bank and the Bank of Eng­land. Our mar­kets will cur­rently see the first 0,5% bank rate rise only by Septem­ber 2011.

— Mon­ey­web. • Cees Brugge­mans is chief econ­o­mist of First Na­tional Bank.

Sim­phiwe Ma­phu­mulo is a di­rec­tor at Gar­licke & Bous­field Inc.

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