Another “final” interest rate cut
The trouble with bi-monthly Monetary Policy Committee (MPC) meetings is financial journalists have to double-up on their interest rate speculation. In the run up to each meeting we quiz economists to get to the bottom of the “will they or won’t they” debate, and in the days immediately after the decision we’re stuck writing on the “will they or won’t they AGAIN” topic. September’s MPC meeting followed the same pattern, with one exception. Most economists polled in the days and hours before the decision got it spot on!
Last Thursday (10 September 2010) the Reserve Bank cut the Repo rate by 50 basis points to just 6% – the lowest rate since 22 January 1981. If your home loan was awarded at prime you’ll be paying 9.5%. The decision to cut interest rates is the first since the surprise 50 basis point reduction approved in March this year, and is likely to be the last for some time. There is only one more MPC meeting scheduled for 2010, in November.
Another 2010 cut is science fiction
Why did the MPC cut rates? The best way to answer this question is to consider what drives the MPC decision. At each MPC meeting they take a snapshot of dozens of macroeconomic measures and forecasts before thrashing out an interest rate decision to further the bank’s inflation targeting mandate. It goes without question inflation and GDP growth feature heavily in their discussions.
The last time the MPC met (in July this year) forecasts for economic growth were robust, with inflation showing signs of gaining momentum again. In the weeks before the latest meeting these numbers changed dramatically. “Inflation has surprised on the downside, and the Reserve Bank has reduced its own inflation forecast,” observed Kevin Lings, economist at StanLib. “And the growth momentum in the domestic economy has slowed, with SA expected to grow well below potential!” Another interest rate cut was sensible given these revelations.
There are two sides to the rate cut “coin”. On the side you’ll find thousands of hard-pressed consumers celebrating a small boost in their net disposable incomes. On the other side of the coin the entire country suffers as GDP growth stagnates. Lings said: “In total, the Reserve Bank has cut rates by 600 basis points since December 2008, which is significant in the context of South Africa’s interest rate history.” The trouble is these repeated cuts don’t seem to have kick started the economy. Instead, much of the extra cash in consumers’ hands has been diverted to higher taxes and administered prices.
Less cash in hand than expected
What does anther half percent cut mean to Average Jane? If Jane’s home was mortgaged to the tune of R1 million the combined 6% cut since December 2008 would have reduced her monthly home loan payments from R13 538 to around R9 321 – a reduction of R4 217! Viewed in isolation, the latest half percent would “free up” R328.
But Jane isn’t pocketing all of this “saving”. Her electricity bill is probably R800 to R1 000 per month higher since December 2008, not to mention the combined effect of municipal rates, water and other administered fee increases. Add private sector wage settlements which are often below inflation during recession, and Jane’s finances could still be tight.
The good news is interest rates could settle at 9.5% for some time. “There are some upside risks to inflation (mainly wages, administered prices and international food prices), but these risks remain well contained and the Reserve Bank remains very comfortable that inflation can stay within the target range for now,” said Lings.
Is there more to come in 2010
Economists’ expectations for interest rate policy decisions change more frequently than the seasons. In Q1 2010 most of the ‘experts’ we approached said we’d seen the bottom of the current interest rate cycle and that the next move – as early as Q3 this year – would be higher. At the time they probably expected the economy to fire on all cylinders post-recession. They’ve since had time to reassess the situation. Two weeks ago we spoke to Paul Hansen, economist at StanLib, who said: “The money market futures are now pointing to a 100% probability of a cut – they’re not always right – but with inflation at 3.7%, lower than expected PPI and fear of offshore fund flows there’s really no choice – we’re going to see a cut.” And we did...
Immediately after the MPC announcements, Cees Bruggemans, Chief Economist at First National Bank said we could see further cuts. “As to future policy moves, one can rest assured these will be made in line with prevailing conditions, data and expectations.” Provided local inflation remains benign and international yield seekers find better opportunities in emerging markets the MPC might cut rates yet again. Bruggemans’ sentiment wasn’t echoed by Lings. “In the MPC statement,” he said, “the Reserve Bank clearly indicated that the scope for further downward movement [in rates] is seen to be limited.” In other words, given current inflation and growth forecasts this could be the “real” bottom in the current interest rate cycle...
Editor’s thoughts: Another MPC – another article on interest rate decisions. FAnews welcomed the 50 basis point “gift” announced last Thursday – but we’re well aware the cut was in part triggered by less than impressive rumblings from the domestic and international economies. Do you feel better off after the combined 6% interest rate since December 2008 – or has your spare cash been diverted to other expenses? Add your comment below, or send it to [email protected]
