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Possibility of a 50 basis point interest rate cut
Possibility of a 50 basis point interest rate cut

All eyes on Bank as market is split on rate cut


Business Report - Jul 21st 2010, 00:00

As the Reserve Bank's monetary policy committee (MPC) meets in Pretoria today, the money market is betting on a 48 percent chance of a 50 basis point interest rate cut - if not when the meeting ends tomorrow then at the next meeting in September. 

According to Ian Cruickshanks, the head of strategic research at Nedbank Capital, this expectation is reflected in forward rate agreements (FRAs) - transactions which run for three months, starting at some time in the future.

The bank's repo rate was cut from 6.5 percent to 6 percent in March and left on hold when the MPC met in May. Since then, the outlook for inflation has improved while growth prospects have faltered, which make a cut more likely. Nevertheless, the consensus view favours no change in the bank's benchmark rate.

Jean Francois Mercier, the Citi economist in South Africa, who expects no cut, said: "The Bloomberg survey of market economists finds that seven out of 23 respondents anticipate a further 50 basis point decline, versus the remainder who project the status quo."

Among those who lean towards a rate cut is Ilke Smit, an economic analyst at Metropolitan Life, who said the MPC would be influenced by the rand carry trade rather than other factors. The carry trade involves borrowing money in low interest currencies and investing it in high rate currencies such as the rand, boosting the local unit in the process.

And, given the concern about rand strength, Smit predicted a further half percentage point cut. Exporters and trade unions have called for moves to weaken the currency and earlier this week the Organisation for Economic Co-operation and Development urged the central bank to moderate rand strength.

Colen Garrow, the economist at Brait, also cited the recent strength in the exchange rate as supportive of a rate cut. Garrow pointed out "the monetary and government authorities have shown their preference for a weak currency, through the repeated mantra of wanting a stable and competitive currency".

Bank of America Merrill Lynch said a number of economic indicators, "suggest that the door for a rate cut remains open to the MPC" and predicted the MPC would "step through the door".

It noted the sharper-than-expected decline in inflation, the very weak labour market and a plunge in the manufacturing purchasing managers index.

It also referred to the "dovish positioning" of governor Gill Marcus, who recently described the domestic economic recovery as "hesitant, fragile and uneven".

Investec group economist Annabel Bishop predicted no cut, but said: "Failing to cut will prolong the survival holding patterns firms have entered, pushing more individuals and businesses to the wall financially, and resulting in further job losses."

Mercier listed a number of factors that would tilt the MPC towards leaving the repo rate unchanged, including the relatively low level of the current real rates - nominal rates minus inflation.

Moody's Analytics said the bank would want to see the "World Cup's effect on prices and economic activity before changing the benchmark rate". 

Read more about: nedbank | finance | banking | bank

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