4 December 2008
editorial
Johannesburg — THIS may come as a surprise to many , but it now looks likely the Reserve Bank will cut interest rates at its policy meeting next week.
That is because there is little now standing in the way of SA joining the dizzying round of rate cuts in most economies, intended to jolt them out of what could be a prolonged recession.
News over the past week has made it clear that SA will be increasingly drawn into the global downturn, through no fault of its own. When that is added to the growing pile of evidence that domestic inflation is going to fall faster than expected , the case for a rate cut looks pretty solid.
In fact, local markets are pricing in a reduction of more than half a percentage point next week in the Bank's key repo rate, which stands at 12%.
They are also betting there will be a cumulative fall of 4,5 percentage points in lending rates in the next two years, unwinding most of the five percentage point rise in this business cycle.
But markets do get a bit ahead of themselves, and most analysts think the speculation is overdone. However, few now think the Bank will keep interest rates steady next week. The argument that SA's banking sector has been relatively shielded from the global credit crisis, and that there are still risks to the inflation outlook, is no longer as compelling. The weaker rand does strike a bit of a sour note as far as inflation is concerned. But its depreciation of about 33% against the dollar this year has been more than offset by the dramatic plunge in oil prices, now at a third of their levels in July.
That has prompted a cut of more than 18% in domestic petrol prices this month -- the biggest on record. It has also finally turned around the rising trend in fuel prices, one of the main drivers of inflation. Compared with the same month last year, petrol is now nearly 2% lower.
That trend is likely to continue for a while, adding to downward pressure on official inflation rates -- which are set to fall as much as three percentage points when radical revisions to consumer price baskets take effect next month. Those revisions are based on an extensive survey of spending habits , so they should provide a better measure of inflation. Food price increases are also slowing, albeit gradually.
All this has helped inflation to subside for two months in a row, rising 12,4% in October, versus 13,6% in August. Analysts think the annual rise will retreat to 7%-9% by next month , and fall back within its 3%-6% target range by the third quarter of next year.
That in itself would justify an immediate rate cut, if the Bank's revised inflation forecasts paint a similar picture. But there are other arguments for the step: one being the shock slowdown in economic growth to 0,2% in the third quarter of this year, a decade low.
Analysts are still scrambling to revise their forecasts for next year, with some predicting annual growth will stall to 1%-2%.
The retail sector is in a recession, with mining and manufacturing set to follow after contracting in the third quarter . Jobs are being shed at an alarming rate, with 12000 planned cuts unveiled by miners in the past few weeks. Local factories have put in their worst performance on record, mirroring trends in many other countries.
At this point it would be hard to justify keeping rates steady.
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