MPC likely to leave rates unchanged

The Monetary Policy Committee (MPC) of the South African Reserve Bank will meet on 24 March 2010 to decide whether to drop, hike or leave the repo rate unchanged. By the time the decision is made public the following day, much economic data will have been discussed in this forum.

Johan Pyper, head of research at Plexus Asset Management, provides the following thoughts on the upcoming MPC decision:

1. Do we expect the MPC to announce any changes to current interest rates?

No! The MPC is still focused on inflation, which is currently above the upper band of the inflation target. Inflation, measured in year-on-year terms, was within the target range for only a short time last year (in October and November). We believe the MPC will wait until inflation is noticeably within the target range before they would consider any further rate cuts.

2. Do we think the MCP should change the repo rate?

Yes, we think they should cut interest rates by 50 basis points. Inflation is not South Africa’s only problem. The economy is struggling with low consumer spending, the inability to create more jobs and lower personal income tax while the nation currently has a budget deficit.

South African companies are also struggling to compete with their global counterparts due to the higher cost of capital and a stronger currency. Access to cheaper credit would certainly help local companies to compete on the global stage. This would result in more business being done, create more employment opportunities and increase consumer demand.

In addition, the extra company tax could help alleviate the budget deficit. While we do not believe a slightly lower interest rate would result in a weaker rand, it could help buffer the rand from strengthening too much.