WILL THERE BE A CUT IN THE INTEREST RATE OR NOT?
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| 9th Governer of the South African Reserve Bank, Gill Marcus, heads up the Monetary Policy Committee. |
Just the sound of having the interest rate dropped should be music to our ears – but, on a larger scale, is it really?
The Monetary Policy Committee (MPC) is scheduled to announce its interest rate decision this week and might feel some pressure to follow in the footsteps of other central banks that have decided to loosen monetary policy.
However, economists are sceptical about whether there is a real possibility of another rate cut and if a breather in this regard will have the desired effect. Elna Moolman, economist at Macquarie Group, says one of the most important events since the last MPC meeting was the massive quantitative easing announced by Japan, but also decisions by a number of other Central Banks to cut rates.
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| Elna Moolman, Senior Economist |
Moolman says it is not so much about the monetary easing itself, but the fact that it sends a very clear signal that those Central Banks are very concerned about downside risks to growth and not only on a short-term basis.
In a note to clients, Ilke van Zyl, economist at Vunani Securities, says ten Central Banks have lowered rates in the year to date (11 if Japan’s expansionary monetary policy is included).
“Comparisons show these countries’ inflation rates are well below the upper limit of their Reserve Bank’s target bands. The only exceptions are Mexico and Turkey, where inflation is currently still residing above the upper limit of the target band. These two countries have however seen steep growth slowdowns of late,” Van Zyl says.
“In contrast, South Africa’s inflation rate is sitting just below the upper end of the target band, with the current rate of growth (2.3% year-on-year) not representing much of a slowdown from the average rate posted over 2012 (2.5%),” she says.
In a market research report, Peter Worthington, analyst at Absa Capital, notes that there are significant differences between the current economic climate and the one of mid-2012, when the previous rate cut occurred.
“Then inflation was falling and well inside the target range while now it has been rising and is near to breaching the upper band of the 3-6% target range. Another key difference is the current account deficit, which is now a big source of concern for the Reserve Bank,” he writes.
Moolman says she does not foresee a rate cut next week – for two reasons.
“Rand weakness will put pressure on inflation and we already expect inflation to breach the target ceiling for a couple of months towards the middle of this year, but I have to add that I am in any case quite sceptical about the growth benefits that we’ll get from any interest rate cut. In other words, I don’t think interest rates are a key constraint to growth at this stage so rate cuts won’t really alleviate any growth pressures,” she says.
Moolman says in the consumer and business environment there are other more critical constraints. Businesses are reluctant to invest and expand employment amidst uncertainty about the medium- to longer-term global and domestic economic growth prospects and that filters through to the consumer side as well, she says.
“So even if you cut interest rates much further, unless that confidence issue is addressed and there is more certainty about the longer-term outlook I think you are going to be stuck in a reasonably low growth environment plus of course our interest rate cuts won’t alleviate any pressure that we’re feeling from subdued growth internationally,” she says.
Worthington agrees. He notes that South Africa’s growth problems can be attributed to a number of issues, but none of them would be solved by a rate cut.
“These include weak global demand for South African exports, and a host of domestic supply-side and structural issues such as widespread labour strife, infrastructure constraints, particular mining sector issues, and low productivity,” he notes.
He believes that the Reserve Bank will keep rates on hold until the third quarter of next year.
Van Zyl says while a rate cut in future is not impossible given the right circumstances, the first possibility of another cut would probably only arise late this year or early next year.