Bet On Markets

Heed the calls for a rate cut and let the good times roll

Heed the calls for a rate cut and let the good times roll < News < Bet On Markets

Given the phenomenal resilience in the external value of the rand and the subsequent containment of domestic prices, calls for an interest rate cut are not without substance. The rand is markedly stronger than this time last year.

When the Reserve Bank lowered interest rates by a symbolic 50 basis points last December, this marginally weakened the rand. But external factors, such as the weak dollar, gave ample support to the domestic currency.

Despite indications that October consumer inflation pointed to an upward trajectory, consumer prices remain well contained. Food prices, considered to be the risk factor, remain subdued.

«A rate cut would galvanise growth levels that are but a dream now».

Ominously, though, unit labour costs could notch higher than normal following above-inflation wage settlements.

But that could be contained because global prices remain well behaved. Even the widening deficit in the current account will not be persuasive enough to stop the bank from cutting rates.

The capital account remains well supported to balance a deficit in the current account. And looking ahead, the rand may continue to be the currency of choice for international investors, given the fall of the dollar.

Economic prospects remain favourable, and attractive. While fiscal policy may be much more expansive than before, there is no threat to long-term rates, themselves a function of a benign domestic price environment.

The popular assertion that inflation could be jerked higher if interest rates are cut in December, while real, remains balanced by the strength of the rand.

Private sector credit extension remains below the psychological 10 percent mark — significantly lower than last year when interest rates were lowered

A rate cut would be good for the economy; it is growing economies that attract investments. And South Africa needs bucket loads of investment as the skills base is too thin to satisfy the hunger for talent.

This could well be the opportunity to lay the foundation to grow the economy by 5 percent to 6 percent a year and benefit from the employment upside. The evident but wobbly retreat in crude oil prices is a welcome relief.

That certainly will be the tonic needed to maintain a low domestic price environment. Combined with a strong rand, the import basket could be cheaper.

Yes, exporters have been gravely affected by rand strength. But I would imagine that they have improved efficiencies and enhanced the quality of their wares to stay competitive.

The resources sector, the worst hit, should take advantage of the high price of commodities occasioned by dollar weakness.

While there is a cost to maintaining foreign reserves, monetary authorities should continue to cream off excess dollars to beef up reserves and maintain currency stability.

It is impossible to state with certainty where the rand will be in a year. But indications are that the dollar could remain depressed, allowing the rand to stay strong. In this scenario, a rate cut would galvanise growth levels that are but a dream now.

And a low rate regime would allow consumers to indulge in spending for the silly season and, no doubt, the audit will show that growth has indeed advanced. So let the good times roll.

By Mandla Maleka

Mandla Maleka is the chief economist at Eskom Treasury. The views expressed are solely those of the author and not Eskom Treasury’s

Click / START NOW! / for opening the new account at Bet On Markets.

See also:

Bet On Markets > Bets/News/Articles/Security/Account/Cashier/About