More rate cuts 'undesirable'

Johannesburg - The repo rate, the rate at which banks borrow money from the SA Reserve Bank, has been cut by 5.5 percentage points since last year, but some economists reckon we could see it a further 0.5 down this week.

But it could be too late in the cycle for more reductions, which would lead to more rapid increases.

After the Monetary Policy Committee left the interest rate unchanged after its last meeting, chances are good that another rate cut could be in the offing, reckons Investec in a weekly forecast.

"The SA Reserve Bank will probably now have even better expectations for inflation which, together with the decline in economic activity and further job losses, would support another interest-rate cut," Investec believes.

The economy is experiencing the first recession in 17 years and, according to Razia Khan, head of economic research on Africa at Standard Chartered in London, a further retraction in the second quarter appears "probable", Bloomberg reports.

But Johan Rossouw, an economist at the Vunani Group, expects that the interest rate will remain unchanged.

He says monetary policy is supposed to look to the future when decisions are being taken.

"Our long-term inflation forecasts indicate that by the first half of 2010 inflation will fall below the upper limit of the inflation-targeting band, but they expect that by the end of that year it will again adopt an upward trend to levels above 6%," Rossouw remarks.

He adds that the full macroeconomic picture also needs to be taken into account and that South Africa is already at a point in the business cycle where further rate cuts are undesirable.

To cut interest rates further too far into the cycle could overstimulate demand, which would eventually mean that the next cycle, in which interest rates are raised, will begin to quickly.

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