Room for more rate cuts, say experts

Johannesburg - Reserve Bank governor Gill Marcus' dovish interest rate address on Thursday and persistently aneamic economic data have prompted speculation among economists that another interest rate cut may be on the cards this year.

The Reserve Bank's monetary policy committee (MPC) elected to shave 50 basis points off the key repo rate to 6% per annum - in line with most commentators' expectations, and the lowest since 1974.  

Earlier this year, many economists may have viewed a repo rate of 6% as the lowest possible point in the interest rate cycle. However, the fact that local economic growth has failed to rebound with confidence may spark hope that another rate cut is necessary for stimulus.

Marcus said the bank had revised down its forecast for inflation and economic growth since the previous MPC meeting in July.  

Growth is seen averaging 2.8% this year, while inflation is forecast to average 3.7% in the third quarter of 2010 and 4.8% over the course of next year.

The gross domestic product actually declined quarter-on-quarter to 3.4% in the second quarter of this year, after a sizeable contraction in the mining sector.

"The argument for a rate cut is that the economy is growing, but not convincingly," said Nedbank economist Nicky Weimar. "So why not cut rates if demand pressure on prices is still weak?"

Weimar said there will be a clear case for the Reserve Bank to cut rates further, especially if the rand remains at current strong levels and if inflation and growth stay weak.

She added the market is already pricing in another 100 basis-point cut from this point.
 
George Glynos, chief economist at ETM, commented in a TV interview following the announcement that the weak consumption demand in the economy has opened up plenty of room to cut rates further.

Meanwhile, other commentators maintain that the rate cycle has hit its lowest point.

"The cut was not surprising at all, given the data out of the second quarter, but the scope for interest rate cuts is getting narrower. I don't think we'll see another cut this year," said Efficient Group economist Freddie Mitchell.  

Marcus said the scope for further rates easing is "limited", despite highlighting the strength of the local currency and the surprising weakness of price inflation and economic growth in her address.  

She did, however, add that the MPC would continue to assess the situation.

- Fin24.com