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Did he buckle?

18 August 2004 Angelo Coppola

(19.8.04) Dawie Klopper at PSG Fund Managers says that some commentators argue that this was a huge mistake and that this is going to lead to severe inflation problems going forward.

Some commentators argue that the governor buckled under political pressure from Cosatu.

If this is true and if the market seriously believes it to be true the rand, to my mind, would already have been considerably weaker as it would spell the end to what we have come to trust in terms of economic policy in the new South Africa.

Others have complained about the cut because it came as a surprise. They argue that monetary policy should be boring and predictable.

A number of economists have, however, called for an interest cut or a change in the stance to monetary policy in recent weeks as it became clear that the inflation outlook has changed.

I would like to think that I am personally in the camp of the latter two groups which, as a matter of fact, is not mutually exclusive.

The outlook for inflation has improved considerably. The last two cuts in petrol prices must still be factored into the inflation rate. Food prices are still declining and so are imported semi-durables.

This will be negated slightly by the changes in assessments rates (July), as well as the future rise in the petrol price (September).

Despite these potential hick-ups it still seems unlikely that CPIX is going to breach the upper target of 6%, although we might get close to it by the end of the year.

Fact is that our real interest rates are still high and if interest rate differentials are determining the inflow of money into the rand, marginally lower interest rates shouldn't lead to a further depreciation in the rand.

Bonds have had an excellent rally but are now overbought. The new range for the R153 is now probably between 8.75% and 11.0%.

We need further confirmation that inflation has stabilized before bond rates will move lower into a new range.

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