The End of the Line for Rate Cuts

The information in this article is courtesy of iAfrica (The party’s over – 28 July 2009)

The Bureau for Economic Research (BER) announced this week that consumers should not expect any interest rate reductions in the foreseeable future.

The bureau's economist Hugo Pienaar said in a statement on economic prospects for the third quarter of 2009, that this was in light of recent double-digit wage settlements in a number of sectors and indications that the worst of the domestic recession might have passed.

Last month South Africa saw Reserve Bank's monetary policy committee deciding to keep the interest rate unchanged at 7,5% after reducing the repo rate by a cumulative 450-basis-points between December 2008 and May 2009.

According to Pienaar the June rate decision can be interpreted as a pause in the rate cycle in order to give the MPC an opportunity to gauge the impact of the rate, which generally takes a while to take effect.

He added that the decision also indicates that we have reached the end of the monetary easing cycle, meaning no further rate cuts should be expected.

Prospect for consumer spending remains a concern mainly due to the potential for further sharp job losses. This means that the Reserve Bank could cut the repo rate further later in 2009 should household outlays continue to deteriorate and inflation slows faster than expected.

“In line with the South African Reserve Bank's latest inflation projection, the bureau's forecast suggested CPI would remain above six percent through February 2010, with a sustained fall below six percent only forecast from the second quarter of 2010,” said Pienaar

He added that petrol prices could decline by more that 20c per litre in the beginning of August due to the strength of the rand exchange rate and a recent drop in the oil price.

All and all South Africans can expect a positive gross domestic product growth from the third quarter, but the economy was forecast to contract by 2% during 2009 bringing the projected growth for 2010 to about 2,7%.