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Cape Town - South African interest rates have been on the high side to keep inflation in check, but the global wave of disinflationary pressures seems to be picking up here too, according to Dave Mohr and Izak Odendaal of Old Mutual Multi-Managers.
They pointed out that, despite exchange rate volatility, electricity tariffs tripling and oil and food price jumps, inflation remained close to 6% in the period after the global financial crisis. Recently it declined to 4.4%.
Mohr and Odendaal expect data to be released this week to show a further decline to 4.2%. Core inflation was at a five-year low of 4.1% in January.
As a result, local interest rates have also trended lower. This should be enough to warrant interest rate cuts, but the SA Reserve Bank (SARB) - set to decide on interest rates next week - appears to have shifted its thinking somewhat in recently times, according to Mohr and Odendaal.
A recent SARB research paper suggests the neutral real interest rate – the rate where inflationary and disinflationary forces are balanced - is 2%. This seems high, said Mohr and Odendaal. They pointed out that, since the introduction of the inflation targeting regime in 1999, the real interest rate has been 3% whereas the average of the last 10 years is around 1%.
"Since an interest rate is simply the cost of borrowing money, if it was too low, there would be excessive borrowing and vice versa. Credit extension in SA is anaemic at around 5%, hardly indicating that rates are too low," commented Mohr and Odendaal.
"Meanwhile, the risks that the SARB have focused on have subsided: the oil price rise has stalled with US shale output booming; further credit downgrades are less likely as fiscal consolidation moves back on track with a VAT increase and spending cuts and despite US rates rising for more than two years', the rand has appreciated over this period."
The other shift in the SARB’s thinking is to target the mid-point of the 3% to 6% target range more explicitly, rather than being comfortable with inflation slightly below the top end of the range, explained Mohr and Odendaal.
That is why they are of the opinion that, until inflation forecasts move towards 4.5%, interest rate cuts by SARB appear less likely.
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