Cape Town - South African fiscal and monetary policy have to play a more central role in limiting the potential impact on the local economy of a global slowdown, central bank Governor Tito Mboweni said on Friday.
He said in a speech the domestic economy was starting to feel the effects of the global economic downturn.
"We are very conscious of the potential impact of the global economic slowdown on our own economy, and are starting to feel the painful effects of this through job losses, rising insolvencies and lower volumes of exports," Mboweni said.
"In this regard fiscal and monetary policies have to play a much more central role."
The speech was posted on the Reserve Bank's website and read on Mboweni's behalf in Cape Town by central bank executive general manager Daniel Mminele.
He made no mention of calling a special monetary policy committee (MPC) meeting to discuss cutting interest rates, which some investors have been expecting for the past two weeks.
South Africa's economic conditions are deteriorating fast, with manufacturing output plunging 11.1% year-on-year in January and consumer demand cooling sharply.
A 21.8% slide in manufacturing output in the fourth quarter of 2008 dragged the broader economy down to its first contraction in 10 years.
A further decline in manufacturing and mining production in January, a collapse in exports and sliding confidence have put the country on course for its first recession in 17 years.
Exports dived 25% in January as recession in major trading partners cut demand for, particularly, resources and vehicles. Retail and new vehicle sales have long been in decline as households struggle under relatively high borrowing costs.
The growth data sparked speculation the MPC will call an early meeting to cut rates, after Mboweni raised the possibility shortly after cutting the repo rate in early February. The next scheduled meeting is for April 15-16.
Draining liquidity
South Africa's Finance Minister Trevor Manuel later told Talk Radio 702 the Treasury's February forecasts, of 3.1% and 1.2% growth for 2008 and 2009 respectively, had taken into account the trends seen in the fourth quarter, but acknowledged conditions had worsened since then.
"We couldn't have known the 1.8% contraction but we knew that the ballpark would probably come out about that ... I think we are seeing a very rapid deterioration in some parts."
He stressed, however, that steel and vehicle production, which performed poorly in January, carried high weightings and may have weighed down the overall figure.
Mboweni said the central bank was monitoring the situation closely.
"The SARB continued to drain significant amounts of liquidity on a net basis in order to maintain a shortage in the money market as part of our monetary policy implementation framework," he said, adding the interbank market continued to operate with no anomalies.
The MPC started cutting rates in December, and has since reduced the repo rate by 150 basis points to 10.5% after lifting it 500 basis points between June 2006 and June 2008.
Analysts and the market sees further aggressive rate cuts this year. Mboweni said last month, after announcing a full percentage point drop, he had wanted a 200 basis point move.
Mboweni said the rate cuts had been made possible by an improved inflation outlook.
"The South African Reserve Bank will continue to focus its monetary policy decision based on the inflation outlook ... whilst taking full cognisance of the global collective efforts to avoid a deep recession."
Consumer price inflation has slowed significantly but the January release, the first under a new price basket, was higher than expected at 8.1%, still outside the 3%-6% band.
Some economists suggest the number may have been the reason why Mboweni has not called a special meeting.
- Reuters