Johannesburg - The next interest rate movement will be down, economists predicted following the SA Reserve Bank's decision to leave the repo rate at 12%.
"It is good news and indicates that (the monetary policy committee) is forward-looking. It shows that there is scope for a significant reduction in interest rates going forward, although this is only likely to happen around April next year," said Elize Kruger, economist at Kagiso Securities.
Although the Reserve Bank governor Tito Mboweni indicated on Thursday that the tightening cycle could not be seen as over, Annabel Bishop, economist at Investec, also expected rates to come down.
She predicted a 50 basis point cut in April 2009.
"We expect no further interest rate hikes this year.
CPIX will fall away
"The SARB made particular mention of the fact that the outlook for inflation remains uncertain, complicated by the impending rebasing and reweighting of the (consumer price inflation) basket for in 2009.
"In addition to the uncertainties regarding the values of the targeted, newly calculated measure of inflation next year, the mortgage interest rate component of CPI will be done away with, replaced by the income which can be charged for renting out homes instead of living in them.
"By definition, CPIX inflation would fall away. Whether CPIX inflation would be replaced by CPI inflation as the targeted measure is uncertain, it is even possible that total country CPI could be targeted instead of CPI for primary and other urban areas.
"The newly calculated inflation values will only be published toward the end of February 2009, after the first MPC
meeting of the year and the first opportunity for an interest rate cut is April, if the SARB waits for the publication of the data before cutting, which we expect it will do. However, it may then need to play catch up, given our forecast magnitude of the fall off in inflation, and interest rates cuts of more than 50bp and/or between meetings are not unlikely."
This week's decision follows 10 increases over the past two years, all by 50 basis points, to try to tame soaring inflation that has raced away from the central bank's 3% to 6% target range to 11.6% om June.
Mboweni said on Thursday that CPIX inflation should peak at around 13% year-on-year in the third quarter of 2008, before declining significantly in 2009.
Thanks to the fall in oil prices, the strengthening of the rand, the slowing of consumer demand in the economy and the changes in the way the CPIX is to be calculated in future, inflation should be within the target range by die end of next year, predicted Raymond Parsons, economic consultant to Business Unity SA.
Food stamps
It can take up to two years for interest rate increases to have an impact on the real economy, he said. The current rate tightening cycle started in mid-2006.
"There are now indisputable signs of a serious and rapid slowdown in economic and business activity, although Busa still expects a growth rate of about 3% in 2009."
According to Parsons, South Africa is relying too heavily on interest rates to drive the adjustments in the economy.
"Busa accepts that several of the pressures on the economy, such as rising oil and food prices, have not been unique to this country. Nonetheless, SA can mitigate these pressures if they are promptly addressed.
Structural steps to boost agricultural production as well as urgent short-term social relief measures should be considered and implemented as part of the adjustment process to changing economic conditions."
A national food stamp system should be considered, Parsons added.
- Fin24.com, Reuters and I-Net Bridge