Early MPC meeting is expected to cut rates
March 19, 2009
By Ethel Hazelhurst
Some economists yesterday criticised the Reserve Bank for doing too little too late. After repeated calls from economists for the bank's official repo rate to be cut, Reserve Bank governor Tito Mboweni has brought forward the next meeting of the bank's monetary policy committee (MPC).
He announced on Wednesday that the MPC would meet on Monday and Tuesday instead of April 15 and 16, as was previously scheduled.
Colen Garrow, the economist at Brait, said: "Not only is the Reserve Bank lagging the monetary easing seen in many G20 (Group of 20) economies but the slow response compromises the delicate balance between recession and recovery."
He pointed out that vehicle sales had contracted for eight consecutive months and leasing finance had contracted for the past 15 months.
Jeff Gable, head of research at Absa Capital, criticised the timing because the announcement would come one day ahead of crucial inflation figures and other economic data in the banks' quarterly bulletin, to be released on Wednesday.
So far the repo rate has been cut by only 1.5 percentage points since December 2008, after a five percentage point hike to a peak of 12 percent, starting in June 2006. The protracted period of high rates pushed the economy into negative growth in the fourth quarter of 2008, when it shrank 1.8 percent.
The bank has also increased the number of scheduled MPC meetings from every second month to monthly - with the exception of July, when MPC members "will take a break", according to bank spokeswoman Samantha Henkeman.
The next meeting will be on April 29 and 30.
Garrow predicted a cut of 100 basis points at the next two meetings and of 50 basis points at every second meeting thereafter. "That means prime could be 400 basis points to 450 basis points lower by the end of 2009."
The JSE banking index rose from 24&nbdsp;886 at 11.30am to close at 25 356. Andrew Vintcent, a portfolio manager at Rand Merchant Bank, said falling rates "will, over time, alleviate consumers' distress and take some pressure off the banks in terms of bad debt".
The rand, which was trading at R9.944 to the dollar in mid-morning, hit R9.80 shortly after 2pm, but gave up much of the gain to settle at close to R9.90 by 5pm.
Many economists believe the combined effect of contractions in advanced economies and high interest rates at home have pushed the economy into recession - two consecutive quarters of contraction.
Mboweni hinted at pre-emptive action at the last MPC meeting early in February, when he announced a cut of one percentage point.
He said then that he would have preferred to implement a two percentage point cut, but had been persuaded by other MPC members to limit the reduction. He also hinted at a meeting earlier than the scheduled date.
John Loos, a property strategist at First National Bank, said rate cuts would have an immediate effect on the demand for property.
"Sentiment has already improved on expectations of rate cuts," he said.
But he warned that the improvement in demand for residential property would be muted because of high household indebtedness, caution on the part of banks and expected increases in retrenchments.
He said distress selling by people who could not afford to service their debt was creating an oversupply of housing on the market, so prices could not be expected to rise until 2010 at the earliest.
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