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Interest rates on hold for now

01 February 2008 Gareth Stokes

Consumers breathed a collective sigh of relief yesterday when Reserve Bank governor Tito Mboweni announced that the MPC had decided to keep rates on hold. Economic analysts were probably well pleased that their warnings had been heeded. Some are on record

Gold Fields suffers a R1 billion hit

Those of you wondering how severely the continued power shortages will impact the economy should look no further than the recent announcement from Gold Fields, one of South Africa’s largest gold mining operations. The company revealed that it would produce between 20% and 25% less gold in the first quarter of 2008. And that means revenue and jobs are under threat.

At current prices the 164 250 ounces of gold production forfeit to power problems would cut revenue $152m (or almost R1bn). To make matters worse, management has warned of the possibility of shaft closures and job losses. The mine can simply not function efficiently on the 90% power Eskom is attempting to supply. Matters are further complicated because Eskom seems unable (at present) to consistently deliver the 90% it promised during talks with the mining industry.

We will have to wait to see exactly how the crisis unfolds. Gold Fields employs more than 50 000 people; but management is not prepared to speculate as to the size of possible cuts. Terence Goodlace, head of South African operations told Fin24: “It’s provocative to talk about job cuts. We need to get a definitive electricity supply and that 90% is not guaranteed in the bank. We are running scenarios at 80% and 90% and we are doing detailed planning.” Gold Fields is just one of South Africa’s major mining players – and you can be sure the other mining houses (Anglo’s, Harmony and Implats) are running similar scenarios as we write this article.

Pressure builds on plunging rand

While gold miners and other heavy industries come to terms with the frequent power cuts, consumers are not out of the woods yet. The reason is the rand’s sudden weakness against the US dollar and other major currencies. Although expected to end the year at 765c to the dollar, some believe it will fall to 800c quite quickly. This puts huge pressure on prices and could see inflation stronger than expected for the balance of the year.

In his speech on 31 January 2008 Mboweni noted that CPIX inflation would average 8.5% in the first quarter – falling toward the end of the year before reaching the 5.6% level some time in 2009. This might be ambitious considering the pressures the domestic economy is facing at present. If, for example, the US goes into recession, we are in for much tougher times. We currently disagree with those economists who predict rate cuts in the third quarter of 2008. There are simply too many question marks hanging over South Africa’s economy at the moment.

US embarks on a rate cutting orgy

If only Mboweni could afford to adopt the gung-ho attitude of his US counterparts. The US Federal Reserve took further action earlier this week in an attempt to steer the US economy from full blown recession. They followed their emergency 75 basis point cut announced last week with another half percent on Thursday. This move brings their lending rate down to 3%. Will it save the US economy? It is probably too early to tell; but the crisis in the US housing market is not going to disappear any time soon. Remember, many US home owners signed mortgages when lending rates were even lower – and they couldn’t even afford their repayments at the lower rates!

Although these successive rates cuts have helped US and global stock markets post moderate recoveries in the last few days we worry about the timing and extent of the Federal Reserve intervention. They usually make small and controlled changes to ensure minimum disruption to the US economy. Perhaps they know something that we don’t – that the US is already in recession – and these huge rate cuts are the equivalent of using a defibrillator on a corpse. They are trying to get the country’s heart beating again.

Editor’s thoughts:
A ‘no change’ call on interest rates is better than a hike. But it will do little to aid the thousands of consumers who are struggling to meet their monthly commitments. Are you happy with rates being left unchanged – or do you think the Reserve Bank should have cut rates to give consumers a break? Add your comments below, or send them to gareth@fanews.co.za

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