Johannesburg - While the Reserve Bank held its cards
close to its chest at yesterday's monetary policy review briefing, giving little away as to what the likely direction of interest rates would be, Nedbank's Economics Unit feels rates will be left unchanged come December 11.
"While the Bank highlighted that the risks to the outlook remained 'amplified', the tone of the address seemed to suggest that unless something extremely untoward happened, the committee would continue to adopt a wait-and-see approach," said the economics unit.
They feel that key risks to the inflation outlook relate mainly to the uncertain global outlook, elevated inflation expectations and related high wage settlements, electricity, food and petrol prices, as well as the likely impact
of the rand's recent weakness.
"The MPC stressed that although the inflation outlook has improved somewhat, it remained concerned about inflation expectations. It reaffirmed that although monetary policy cannot act against the first-round effects of supply-side shocks, it is committed to ensuring that inflation expectations
remain well anchored," noted Nedbank.
The economics unit feels that although the weaker rand remains a concern, it is unlikely to fundamentally alter the inflation outlook.
"Prospects for the domestic economy have continued to worsen, as the local economy is unlikely to escape the impact of a recession in our major trading partners and significantly slower global growth," they say.
The case for monetary easing will become increasingly compelling as the domestic economy slows.
"We thus believe that by April 2009, with inflation firmly in single digits, the Reserve Bank will begin cutting rates. However, should the rand depreciate even more steeply the Bank may be reluctant to cut interest rates as soon as the market expects," said the Nedbank economists.
Voting member of South Africa's Monetary Policy Committee, Dr Brian Kahn, said on Tuesday evening in Pretoria that there has been quite a substantial change in the balance of inflation risks in South Africa due to the rand going weaker and oil declining substantially.
He was speaking during a briefing after the South African Reserve Bank's (SARB's) release of its latest MPR and highlighted that there were now also downside risks to growth in the international economy, with consumption expenditure and inflation slowing.
"This all has downside risk, but what the ultimate outcome will be is difficult to tell at this stage," he said.
Kahn felt that while the reweighting and rebasing of CPI could cause a temporary change in expectations and possibly then on wage negotiations in 2009, it is unlikely to have a "major influence" on monetary policy decisions "due to the time period we focus on".
The SARB said in the MPR that inflation should return to the band in the second quarter of 2010, but that there were risks to the outlook.
Pass-through
Kahn said it was important that inflation expectations were anchored.
"A lot will depend on how the rand moves and how sustained it is and how quickly it comes back again," he noted.
"The more the rand moves the more pass-through we are likely to get from the exchange rate to inflation - it increases upside risk," he said.
"But if it is a very temporary move and comes back to more moderate levels the impact is much less," said Kahn.
He concluded by saying that any thoughts of rate cuts would depend on the circumstances at the time of the decision and where inflation is in terms of the target range plus the assessment of risks at the time.
"But it is very difficult at this point to say where we will be on the trajectory. That's a judgement call that has to be made at each meeting," concluded Kahn.
- I-Net Bridge