Comments by Guma spark fears of rate hike
Talk of end to stimulus plan
February 9, 2010
By Ethel Hazelhurst
To view a graph tracking the repo rate compared with the prime interest rate - click here
Comments from Reserve Bank deputy governor Xolile Guma, implying that South Africa's rate cutting cycle may soon be reversed, took economists by surprise.
According to reports from Sydney at the weekend, Guma said in an interview that local policymakers were considering whether or not to maintain stimulus measures introduced to help the economy out of the recent recession.
He is attending the 50th anniversary celebrations of the Reserve Bank of Australia.
While central banks in many countries were forced to flood their financial markets with cash to keep them from stalling, this was not the case in South Africa. The key intervention in the local economy was to cut the bank's repo rate from 12 percent to 7 percent.
If the bank is going to reverse this measure, South Africans will have to expect a rate hike.
However, Danelee van Dyk, an economist at Standard Bank, said a hike was unlikely before the end of this year and Elna Moolman, the group economist at BJM, said not before March next year.
The debate rather is whether rates should be held or cut further, when the bank's monetary policy committee (MPC) meets next month. At the meeting last month, governor Gill Marcus admitted that some MPC members had argued strongly for a rate cut.
Reserve Bank spokeswoman Samantha Henkeman said only Guma himself could clarify his comments. However, she said he was in meetings in Sydney and she was unable to reach him.
The repo rate was raised from 7 percent to 12 percent between June 2006 and June 2008, and cut to 7 percent between December 2008 and August last year. It was held at that level despite calls from trade union federation Cosatu and other critics of tight monetary policy for further cuts to be made.
And before last month's MPC meeting, most economist believed the rate cutting cycle was at an end.
But Marcus's comments gave new life to the debate.
Moolman said: "There is a very strong chance of a rate cut next month." But she said the February 23 announcement by the electricity regulator on tariff hikes would play an important role in the decision.
Power utility Eskom has asked for a 35 percent annual increase in each of the next three years.
Moolman said data on fourth-quarter gross domestic product would also influence the MPC's decision.
In the third quarter the economy emerged from three quarters of recession with annualised growth of 0.9 percent and nearly a million jobs were lost in the first three quarters of last year. Fourth-quarter data is due for release today.
Moolman said the decision would be a "close call at this stage and there could be scope for another cut".
Kevin Lings, the economist at Stanlib, said the rate would probably remain unchanged because of the relatively favourable data released since the last MPC meeting. He said motor vehicle sales, the outlook for manufacturing production, building plans passed and house prices showed the economy was either improving or past its worst.
Annabel Bishop, the group economist at Investec South Africa, said a further rate cut "would be beneficial for the economy" as there were likely to be further retrenchments in the first quarter, confidence was weak and the consumer was still heavily indebted.
However, she believed that rates would probably remain unchanged, unless a change to inflation targeting was announced in the budget.
|
|
