Thursday rate cut is a given
As the Monetary Policy Committee of the Reserve Bank meets on Wednesday and Thursday this week they have more than enough ammunition to motivate another interest rate cut. So the question on everyone’s mind is not whether a cut will be forthcoming; but ho
As the Monetary Policy Committee of the Reserve Bank meets on Wednesday and Thursday this week they have more than enough ammunition to motivate another interest rate cut. So the question on everyone’s mind is not whether a cut will be forthcoming; but how much the cut will be. It seems we’re guaranteed 50 basis points; but everyone is hoping that governor Tito Mboweni announces a full percent.
Those who favour a deep cut point to the urgent need to boost the country’s ailing economy. From recent news flow it’s clear that corporate South Africa is on the back foot as global growth slows. The front page of today’s Business Report laments the state of the motor vehicle industry – a proxy for many of the country’s manufacturing business. The January numbers released by the National Association of Automobile Manufacturers of SA (Naamsa) confirm the trend that began last year, with a 34.4% slump in new vehicle sales in January. No wonder some industry players are calling financial assistance from Treasury!
New benchmark slashes inflation
But it’s going to be difficult for finance minister Trevor Manuel to accommodate these demands. Manuel is already under pressure to find billions of rand to fund the ruling party’s manifesto promises over the next few years… And he’s going to have to do this while revenues – particularly those from corporate income tax – tumble in 2008/2009 and 2009/2010. Corporate earnings in the resources, banking, financial, credit retail and manufacturing sectors look set for a major contraction!
With all the negative news the latest inflation data is a breath of fresh air. Statistics SA announced on Tuesday that the CPI measure came in at 7.7% for the year to December 2008. Economists will now turn their attention to the January 2009 inflation number, due on 25 February, to see how much of an impact the rebasing and re-weighting of the inflation basket will have. Major changes to the basket of goods used in calculating inflation will have an immediate impact. Food – which recorded 17.1% month-on-month inflation in December last year – only accounts for 13.63% of the spending basket compared to 25.66% previously. We can expect the 10.3% CPI number to fall quite some way – with economists predicting a move below 6% by year end.
Statistics SA has made some other interesting changes. CPI will replace CPIX as the Reserve Bank’s target inflation in 2009. In the ideal world, the bank wants CPI in the 3% to 6% band that we’ve mentioned so many times before. The impact of mortgage interest costs will be stripped out of the equation and replaced with the “owner’s equivalent rent” concept. Although there are concerns about the makeup of the new inflation basket it’s too late to fuss over them now. We hope that Statistics SA performs this re-weighting exercise on a more regular basis in coming years.
Prices still showing some fight
Unfortunately the inflation beast still has some kick. Motorists were queuing at petrol stations yesterday to make sure they have a full tank before the price is hiked 66c per litre at midnight. Earlier today we read that the Airport Company South Africa (ACSA) was going ahead with an 18.5% increase in airport taxes. There’s also the threat of a steep price increase from Eskom later this year as costs on its expansion programme soar. And we’ve noticed a range of increases in imported goods due to the weaker rand / dollar and rand / Euro exchange rates.
The most obvious threat to price stability for the remainder of 2009 comes from the currency risk. If the rand slides to worse levels against the dollar, Euro and pound then we could see severe pressure on import prices. Other than that it’s all systems go for lower inflation and interest rates through 2009!
Editor’s thoughts:
Local consumers can expect a number of interest rates cuts this year. The money market is pricing in 400 basis points for the full year. But we’re beginning to doubt whether these cuts will be enough to kick start certain sectors of the economy. It looks like government will have to come to the party with some sort of bridging finance. Do you think an interest rate cut will boost sales at motor vehicle retailers? Add your comments below, or send them to [email protected]
