No interest rate cut (yet, if at all)
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.