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20 July 2010 Sanlam Investment Management
Arthur Kamp, Economist at Sanlam Investment Management

Arthur Kamp, Economist at Sanlam Investment Management

Comments from Arthur Kamp, Economist at Sanlam Investment Management on the SARB MPC announcement, 22nd July 2010

Predicting the outcome of a Reserve Bank Monetary Policy Committee (MPC) meeting when we are at, or close to, the bottom of the interest rate cycle is hazardous. In my opinion, it could go either way but, while it would be risky to bet on the outcome, we lean towards the likelihood of the Bank leaving rates unchanged.

As we head into this week’s meeting, inflation has slowed materially towards the middle of the Bank’s inflation target range (4.6 per cent in May) and seems set to slow further in the months ahead. For it to cut the repo rate again, the Bank would have to have made a significant downward adjustment to its medium- to long-term inflation forecast. Another swing factor would be if the Bank expects the rand to remain strong.

Meanwhile, in the real economy, first quarter household consumption spending was strong but the domestic economic upswing still does not have strong momentum and private sector credit data remains weak. So, the output gap – the difference between the economy’s potential and actual output - is hardly a threat to the inflation outlook. However, the uncertain global environment poses the same risks to the currency and the inflation outlook as identified by the Bank in May. Also Governor Gill Marcus warned earlier this month if wage increases, currently in excess of inflation, are not matched by productivity “there are likely to be inflationary consequences”.

This suggests the Bank would view the risks to the medium- to long-term inflation outlook as evenly balanced. For this reason, we expect the Bank to leave interest rates unchanged. We must stress, though, an interest rate cut against the backdrop of recent benign inflation data would not be an especially big surprise. Whichever way they do go, final demand will benefit from an extended period of relatively stable, low interest rates.

Incidentally, on the rand, the OECD’s call to weaken the currency is focused on intervention to build foreign exchange reserves, rather than cutting interest rates. It is unlikely, however, that the Bank would want to target a level for the exchange rate.

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