Three reasons for a Christmas rate cut
Predicting economic trends is a mugs game. No matter how much historic data you have at your disposal, financial markets always find a way to throw a curve ball. Did you think that the rand would end 2008 at around R8.50 to the dollar? You’re not alone – hundreds of respected asset managers, banks and financial institutions through the same. That’s why you have to take economists’ estimates for inflation, interest rates and currencies with a pinch of salt.
Despite this knowledge we’re obsessed with guessing what’s going to happen next. Take the Reserve Bank’s Monetary Policy Committee (MPC) meeting to be held in December. Concerned consumers are desperate to know if bank governor Tito Mboweni will cut interest rates. And that means the financial press is hounding the analysts for their answer…
There’ll be a whole lot of ‘coin tossing’ going on!
Since their guess is as good as ours, we’ll unpack some of the recent economic developments that will guide the MPC during their upcoming debate. And where better to begin than with inflation?
The latest CPIX – a measure of consumer price inflation with the impact of mortgage repayments stripped out – will be released later today. Economists expect October 2009 to show a 12.5% year-on-year increase, lower than the 13% in September and the second month of decline since the 13.6% August high. That’s good ammunition for our interest rate busting argument. If price levels are coming down then Mboweni’s repeated rate hikes since June 2006 are finally taking hold. That’s reason number one.
Add this information to the Statistics SA’s much discussed re-basing of the inflation basket in January next year and the argument is even more compelling. Industry experts say the new basket of goods used to measure inflation will result in an immediate 2% (or more) decline in inflation. The MPC already knows this – they score a massive reduction in price inflation without lifting a finger… They also know that a cut in the interest rate isn’t going to result in a massive bout of consumer spending. The consumer is under so much pressure that any additional ‘cash’ will be used to put out fires, paying off existing debt and catching up on missed hire purchase instalments rather than new goods and services.
Oil and the rand lead us a merry dance
While interest rates were on the rise the rand and oil price went against us. We hardly managed a month without a steep hike in the price of petrol and diesel in 2007 and 2008. With Christmas in sight the good news is that we’ll see a big drop in the pump price – possibly as much as R1.65 per litre for 93 Octane fuel. As long as oil remains below $50 per barrel and the rand steadies at around R10 to the dollar the price shouldn’t move much higher from there. We all know that the price of fuel has a massive knock-on impact on all goods and services offered in the country. So this price reduction will certainly knock a few more percentage points from the inflation number just mentioned. That’s the second reason.
The MPC must also consider the steps taken by the central banks of some of South Africa’s major trading partners. The Bank of England cut their interest rates by a massive 150 basis points recently – a kind of vitamin injection for the economy as it slid into recession. With the domestic economy teetering on the brink of recession such an injection would probably (with luck) prevent us from following the same slippery path!
Softer growth could be the decider
And the third part of our ‘triple whammy’ interest rate buster is the state of South African business. When Statistics SA released Q3 2008 GDP growth earlier this week some of the domestic economy cheerleaders will have stopped mid-stride. Instead of the 5% we’re accustomed to, quarter-on-quarter GDP growth was a mere 0.2%. Economists say the full-year 2008 growth will come in at around 1.9% and we’re pretty certain of negative GDP growth in Q4. A repeat of Eskom’s load-shedding crisis early in 2009 would plunge the country into technical recession.
Corporate South Africa is already taking steps to cut costs into this recessionary environment. They’re halting capital expenditure, scaling down production and laying off staff. There’s little government can do to bolster the domestic economy because they’re already spending to the hilt. So the only stimulus we can offer the economy is to cut interest rates – and the Reserve Bank will be making a big mistake if it waits until February or April next year! As T-Sec economist Mike Schüssler notes: “For all intents and purposes – for the people on the ground – this economy is in a recession.” The country needs a rate cut now.
Editor’s thoughts:
An interest rate cut is not a ‘cure all’ for the domestic economy. The first rate cut will be like applying an emergency brake on a runaway train. It will only slow the economic decline. To really turn things around requires a series of cuts and a revival of the global economy. What’s your take on the interest rate debate? Will the Reserve Bank cut interest rates in December – or will we have to wait till 2009? Send your comments to [email protected]
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