Johannesburg - Pressure is mounting for the South African Reserve Bank to start cutting rates or risk falling behind the
curve, Moody's Economy.com said in its weekly commentary on Friday.
It said the rising tide of weak economic indicators bolstered the case for the bank to begin cutting rates.
"Financial markets are pricing in a 50-basis point rate cut, which would take the key repo rate down to 11.5%. Nevertheless, concerns about the weakening rand could prompt the monetary policy committee to keep interest rates on hold next week," the analysts said.
According to the analysts, although the sharp fall in global commodity prices has vastly improved South Africa's medium-term inflation outlook, at the most recent Sarb meeting, in mid-October, the country's central bankers reportedly did not even discuss lowering rates because of heightened concerns about volatile exchange rate movements.
"Nevertheless, the outlooks for the global economy and South Africa have continued to darken since then. A tsunami of weak economic indicators in recent weeks has bolstered the case for the bank to begin cutting rates at its December meeting," Moddy's Economy.com added.
It noted that data released during the week showed that the country's auto industry remains under extreme pressure. Sales of new vehicles in November came in a massive 28.3% lower than the same month in 2007. On a year-to-date basis, vehicle sales have fallen 19.8%.
"Not surprisingly, business confidence is under pressure," the analysts added. "Although South Africa's Chamber of Business monthly business confidence index managed to nudge higher in November after declining for the previous three months, the First National Bank's building confidence index fell sharply in the fourth quarter.
"Business confidence in South Africa has deteriorated sharply since the start of the year and is expected to remain deeply depressed in coming months as firms battle strong headwinds, including slowing sales, high borrowing costs, and tight credit conditions."
As business sentiment is a leading indicator of future investment, weak confidence suggests local firms will continue to pare expansion and hiring plans in coming months, according to the analysts.
"Businesses are likely bracing for a protracted period of soft domestic and external demand. This has raised concerns about slowing employment growth. Rising unemployment and softer wages growth would put South Africa's highly indebted households under extreme pressure. It appears increasingly likely that the spreading global economic downturn will engulf South Africa
next year," they said.
- I-Net Bridge