Rate cut gives analysts a 'pleasant' shock
August 14, 2009
By Ethel Hazelhurst
Yesterday's half percentage point cut in the central bank's key lending rate shocked analysts, who had been expecting no move.
After Reserve Bank governor Tito Mboweni announced the bank's repo rate would go to 7 percent, a level last seen in June 2006, he was bitterly criticised by economists for sending mixed signals to the market.
The majority of analysts polled by Reuters last week forecast the rate would be kept on hold after 4.5 percentage points of cuts between December and May and a hold in June.
Forward rate agreements, contracts which run for three months starting some time in the future, had shown no further cut was expected at this point.
Dawie Roodt, the chief economist at the Effficient Group, said in an interviw with SABC3 after the televised rate announcement that he was "totally flabbergasted".
George Glynos, the managing director of market analysis firm ETM, pointed to the bank's monetary policy committee (MPC) statement that said there had been little change in its inflation forecast since the last meeting in June. Inflation is expected to fall within the target range of 3 percent to 6 percent int he second quarter of next year from 6.9 percent in June.
"If it hasn't changed much, why wasn't the rate cut in June as we had anticipated at the time?" Glynos asked.
Mboweni remarked after the May meeting that a further "significant" rate cut was unlikely, but economists had expected that the poor economic data would bring a further half percentage point cut in June.
Glynos described yesterday's cut as "a pleasant surprise" but said there were "question marks about messages sent out by the bank". His view that there was room to cut rates to 7 percent was based on the expectations that inflation would return to the target by the first quarter of next year.
Dawie Roodt, the chief economist at Efficient Group, said the governor had set out in the statement all the reasons "rates should not be cut but in fact should be increased", but had then announced a rate cut.
The MPC statement referred to "adverse cost pressures".
These included the price of Brent crude oil, which has remained above $70 (R569) a barrel for most of the period since the June meeting; administered price increases, particularly electricity tariffs; and wage increases in excess of inflation, which had increased unit labour costs by 11.2 percent over four quarters.
The statement referred to an improvement in the global economic outlook, which made a rate cut less necessary than it was two months ago.
Roodt criticised the latest cut in the repo rate, which influences short-term interest rates. He pointed out that longer-term rates had been going up "for very good reasons". These included the low level of savings and the government's budget deficit, which will come in much higher than the nearly 4 percent projected in the February budget. He said the bank had pushed rate cuts "too far".
However, Razia Khan, the head of Africa research at Standard Chartered, described the rate cut as "absolutely the right thing to have done. Although inflation remains above target, the downside risks to growth are - in our view - much more important."
Jacques du Toit, a senior property analyst at Absa, said mortgage repayments were now 26.3 percent lower than they were in December, when the mortgage rate was 15.5 percent.
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