Johannesburg - South Africa's real interest rates are now the second highest in the world, exceeded only by Brazil.
A study by Credit Suisse Standard Securities found that South Africa's real rate was running at 2.8% compared with a current repo rate of 6.5% and a consumer price index (CPI) of 3.7%. Brazil was the only country with a higher real rate at 6.15%.
The study, on 14 of the world's top economies, showed that seven of these countries currently have real negative rates, which means they are lower than the prevailing average inflation rates.
In some cases inflation is significantly higher than in South Africa.
The Reserve Bank’s Monetary Policy Committee (MPC) is meeting this week to take a decision on future direction. In all, 19 of 23 economists indicated in the survey that they expected a 0.5 percentage point reduction in the repo rate. This was despite remarks by Reserve Bank governor
Gill Marcus in Soweto last week that a rate cut was not a given.
But to judge from daily rate movements in the money markets, a cut is expected.
Economists believe a reduction is necessary at this point to turn declining economic growth around and ensure that the tentative recovery becomes more sustainable.
Citigroup economist Jean Francois Mercier said in a research report that the group stood by its view that a rate reduction was on the cards. The Reserve Bank will probably stress that the reduction is a one-off to stop speculation about further decreases, he said.
The only country whose rates are close to South Africa's is Russia, with a real rate of 2.25% based on inflation of 5.5% and a 7.75% lending rate.
China's real rate is currently 2.01%.
Several countries have significantly negative real rates, which some central banks regard as a dangerous development because the rates could again lead to excessive credit extension with "cheap money".
All the big developed economies currently have negative real rates. Rates in the US are running at -0.95% with the rate only 0.25% and inflation 1.2%, while the eurozone's rate remains at 1% which, with inflation running at 1.7%, means a negative rate of 0.7%.
Britain and India's negative real rates of -2.6% and -5.5% respectively are among the highest. In Britain, one of South Africa's biggest trading partners, inflation is now running at 3.10% with that rate at 0.5%.
Hungary is one of the countries that needs to inject its economy with a stiff dose of fiscal medicine, but its real rate, at 1.25%, is still lower than that in South Africa.
Turkey, a country saddled with similar problems to those of other emerging markets, has a negative rate at -1.08%.
In India and Argentina it is already above 11% and in Turkey 7.58%.
Credit Suisse Standard Securities predicts that local rates will fall 0.5 of a percentage point on Thursday. The global economic environment since the July meeting has deteriorated further.
In South Africa economic growth is falling, while job losses of more than one million in the past five quarters are "indefensible from a political and social viewpoint".
The focus needed to fall on creating additional job opportunities that would flow from higher economic growth.
- Sake24.com