Mariam Isa
29 May 2009
Johannesburg — STUBBORN inflation will prevent interest rates from falling much more this year, but there is little more that monetary policy can to do to boost the economy at this stage.
Reserve Bank governor Tito Mboweni made it clear yesterday that speculation that the repo rate could dive to 6,5% next month after being cut by a percentage point to 7,5% now is probably misplaced.
"Given the kind of stickiness seen in inflation outcomes, the mood in the committee is not for any further significant reductions in the repo rate," he told reporters yesterday.
"There is a feeling we may have done as much as we can -- maybe it's time to pause and watch."
The governor was replying to a question after revealing the decision by the monetary policy committee (MPC) to lower interest rates for the fourth time this year yesterday.
The hefty cut had been expected after news earlier this week that the economy shrank by 6,4% in the first quarter of this year -- the steepest fall in 25 years, ushering SA into its first recession since 1992.
But there were many analysts who had said the Bank might opt for a smaller half percentage point rate cut, given other data showing that inflation barely budged last month.
Lending rates have fallen by 4,5 percentage points since December, and it takes up to 18 months for changes in interest rates to make themselves felt in an economy.
At the same time, inflation measured by a revamped consumer price index (CPI) has exceeded forecasts every month since it was launched in January. The gauge rose by 8,4% in the year to April, slowing from 8,5% in March but still well outside its 3% to 6% target range -- which has been breached for more than two years.
"They (the MPC) are finally waking up to the second-round effect reality of inflation," said Nomura emerging markets economist Peter Attard Montalto. He believes that pressure from electricity price hikes and double-digit wage settlements will keep inflation out of the target range until the end of next year.
That could very well be what the MPC thinks too. It was unusually vague on its inflation outlook, apart from saying that the downward trend would continue and "over the long term, there appears to be a moderate improvement".
This was a far cry from the Bank's previous practice of saying exactly when it expects inflation to be back within the target, and at what level.
Instead, the MPC statement cited the latest consensus forecasts from Reuters, which predict an inflation average of 6,9% this year and 5,7% next year. When pressed, Mboweni said that the MPC no longer wanted to be "pinned down" to a particular point for inflation. It would be better to "talk about probably distribution from now on", he said.
Mboweni also said that "the discussion that led to yesterday's decision was quite intense", with some of the seven-member MPC arguing for a half percentage point cut.
He said it was time to shift the focus away from monetary policy to other "structural rigidities" which made it difficult for the Bank to achieve its inflation mandate.
These included investigating the "nature and structure" of competition in the economy, especially in the food market, he said. Local food prices have been slow to recede, despite sharp falls globally.
Nonetheless, analysts believe that there is still scope for another half percentage point cut in lending rates, probably at the Bank's next policy meeting next month.
"Our expectation is that the MPC will cut the repo rate again at its June meeting, but by 50 basis points," said Cadiz African Harvest economist Adenaan Hardien.
"The governor's comments ... certainly bolster this view of the rate cycle nearing its end and subsequent cuts being moderate in size."
Much depends on the course of the global economy, which the Bank has no control over. Yesterday's MPC statement dwelt heavily on the view that "the global recovery is expected to be slow and protracted".
It also acknowledged that the economy was likely to contract again in the second quarter of this year, albeit at a more moderate pace.
Many analysts believe that output will shrink by close to 2% this year, and Treasury director-general Lesetja Kganyago has said that if SA achieves "zero growth" this year it will be doing very well, given the severity of the global downturn.
The MPC highlighted the risk of upward pressure on inflation from electricity prices, after power utility Eskom requested a 34% tariff hike.
It also noted that oil prices were rising, but pointed out that the impact of this on local fuel prices had been "partly offset" by gains in the rand -- which has scaled eight- month peaks at about R8 to the dollar this week.
Noticeable by its absence was any mention of high pay increases, which are above the current inflation rate.
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