Rate cut in balance - Dykes

Johannesburg - Chances of an interest rate cut hung in the balance on Tuesday, according to Nedbank senior economist Dennis Dykes. He added, however, that the South African Reserve Bank (Sarb) would be mindful of job losses and food inflation.

The repo rate - the rate at which Sarb lends to commercial banks - stands at 7% at present, while commercial banks lend at 10.5% (prime) to consumers.

The interest rate has fallen by 500 basis points since December.

Speaking on AM Stock Take, Fin24.com's morning podcast, Dykes said economic data indicated the economiy had weakened in the last quarter.

"The economy remains exceptionally weak; data show a bleak picture. But we have to concede that inflation is not going to come down much below the target range," he said.

If there is no cut on Tuesday, there would be one later in the cycle, he added.

Employment figures released in October showed more than a million jobs had been lost in 2009. Cost inflation, including food and oil, was evident but this was not directly linked to consumer demand, he said.

Commenting on Gill Marcus, Sarb's newly-appointed governor, Dykes said he expected she would keep a consistent view on interest rate changes and not be swayed by popular demand.

No mandate change foreseen

News agency Sapa, citing Standard Chartered Bank's Razia Khan, said the repo rate would be left on hold.

"While Marcus herself cuts an almost unique figure with strong ties to both South African business and the left, we expect that the repo rate will be left on hold," Khan told Sapa.

Firstly, with the debate on the inflation targeting framework set to get under way only next year, Sarb would continue to operate under its current mandate for now. Secondly, the mandate had in any case always been interpreted flexibly, she said.

"Monetary policy decisions taken now only impact inflation two years down the line. Moreover, in early 2008 the power crisis forced Sarb to pause, temporarily, its tightening cycle," Khan said.

Easing had begun in December 2008, when inflation was twice the upper level of the official target.

"Growth has always been a consideration in Sarb's rate decisions, even if not stated explicitly."

With South Africa's economy showing clear signs of having reached a turning point, Khan expected the repo to remain at 7%.

"While the strong rand is a potential spoiler, there is no consensus at Sarb that cutting interest rates will necessarily weaken the currency."

Khan said for markets, the real uncertainty lay further out - whether inflation (to paraphrase former Sarb governor Tito Mboweni) was still considered by all to be the "original sin".

- Fin24.com