Shock rate move may mean end

Johannesburg - The South African Reserve Bank's (SARB's) Monetary Policy Committee (MPC) on Thursday went against popular opinion to keep the repo rate on hold at 7.5%.

Consensus expectations were for a cut of 50 basis points.

Mike Schüssler, economist and director of Economists.co.za, says the decision would have taken most people by surprise.

"Including myself. It is perhaps an indication that most of the rate cuts are now behind us.

"It shows that perhaps the MPC is having second thoughts on fighting inflation and we can only hope that there might be a further cut in the second half. It's obviously not good for money markets, and as many economists have already suspected, we may have approached the end of our cutting cycle," Schüssler said.

Notably, SARB Governor Tito Mboweni zoned in on renewed risks to the inflation outlook, particularly from electricity, administered prices, wages and oil. Eskom had just received a 31.3% tariff increase. He added that food prices were coming down, but at a slower pace.

Mboweni said the MPC was concerned that inflation remains "stubbornly high" and that the rate of decline "remains very small". CPI came in at 8.0% for May, according to data this week, still well above the upper 6% target limit.

Economists spoken to by I-Net prior to this announcement felt a 50 basis point cut would signal a terminal rate in the repo in the current cutting cycle. Mboweni did not divulge too many insights about what would transpire that far ahead, but it certainly appears inflation will need to play along to a far greater degree.

Mboweni did say that while economic growth would continue in negative vein in the second quarter, there were some signs - like from the leading indicator - that the lower turning point in the cycle could be reached later in the year.

"We want to maintain inflation at low levels, not at high levels," emphasised Mboweni. He conceded that the MPC had only harboured a "brief discussion" about reducing by 50 basis points, but the decision quickly became a unanimous one of no change.

He said the SARB's forecast is that CPI is still expected to continue with its moderate downward trend and be in the target rate by Q2 2010, where it will remain for rest of period ending 2011. He began his speech by saying: "The economy continues to show signs of stress."

- I-Net Bridge