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But this is only possible if the rand remains strong and inflation is lower than expected, experts forecast. |||

With benchmark prime and mortgage rates at 9 percent – the lowest level since 1974 – South Africa’s rate-cutting cycle may not be at an end. When Reserve Bank governor Gill Marcus cut the bank’s key repo rate by half a percentage point to 5.5 percent on Thursday, she said there was not much room for a further cut. But some economists are second-guessing her.

George Glynos, managing director of Econometrix Treasury Management, said inflation would fall further than the bank forecast on Thursday.

The monetary policy committee (MPC) predicted consumer inflation would average 3.5 percent in the current quarter and rise to an average 4.3 percent next year.

Glynos said inflation would be “substantially softer” in the year ahead, falling to 2 percent or less – below the bank’s 3-to-6 percent target range.

The reason for this forecast is that he is “very bullish on the rand” and expects the exchange rate to fall towards R6 to the dollar next year. The rand traded yesterday at R6.95 to the dollar. Glynos said the currency’s gains would leave scope for a 50-basis point cut in the first half of next year.

Annabel Bishop, group economist at Investec, predicted a similar cut, “potentially as early as January”. She put inflation next year at 3.9 percent.

However, most economists are more cautious.

Arthur Kamp, economist at Sanlam Investment Management, said inflation next year would be 4.4 percent. The reason he saw inflation higher than the bank’s forecast was potential rand weakness. He pointed out the rand had been strong only against the US dollar – a reflection of dollar weakness – but the trade-weighted rand had appreciated by only around 2 percent over the past six months. “The latter is more important in determining interest rate decisions.”

With this in mind, Kamp said the bank had reached the bottom of the interest rate cutting cycle. “Inflation is bottoming, final demand is recovering, emerging market economies are likely to shift towards less accommodative monetary policy stances in the year ahead and the domestic real policy rate (based on expected, not current, inflation) is low.”

The “real rate” is the nominal rate minus inflation.

Other reasons Kamp cited were global soft commodity prices were higher and domestic unit labour cost growth was strong.

Jeff Gable, head of macro and fixed income research at Absa Capital, said: “Right now, we see no reason for a further rate move. The Reserve Bank moved its inflation forecasts pretty aggressively this time.”

The MPC cut its forecast from 4.8 percent at the previous meeting.

Gable said he shared the bank’s view that inflation could move either way. “So I can’t forecast another cut now.”

Razia Khan, head of Africa research at Standard Chartered, did not expect a further cut. “They’ve left it open. But in the absence of a new shock – no, probably not. We see inflation drifting up gradually from these levels.”

Inflation in September was 3.2 percent.

Elna Moolman, Africa economist at Renaissance BJM said: “The bank left the door open for further easing, but only if something changes.”

She said only lower than expected inflation would prompt another move.

Kevin Lings, economist at Stanlib, also saw interest rates on hold.

What emerged from the debate is the rand is seen as the swing factor in further rate decisions. This should affect perceptions that a weak rand is the best possible prescription for South Africa’s economy.

Finance Minister Pravin Gordhan and Marcus have both been under pressure to counter strong inflows from abroad which have been driving up the currency.

However, the bank has cut its interest far lower than was expected a year ago. The cuts would not have been possible without a strong rand. – Business Report

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