September 10, 2003

By Vernon Wessels

Johannesburg - The Reserve Bank will more than likely trim interest rates by at least 1 percentage point after a special sitting of the monetary policy committee (MPC) today, according to a Business Report survey of 10 economists.

This could be followed by another interest rate cut in October or December of another 1 percentage point.

The prime lending rate is currently 14.5 percent, which most economists expect will fall to 12.5 percent by the end of the year and remain flat for most of next year, according to the poll.

The Reserve Bank took the market by surprise on Friday when it announced a special sitting of the MPC. The committee met barely four weeks ago and reduced rates by 1 percentage point, following a 1.5 percentage point cut in June, and was due to meet again on October 15 and 16.

Monica Ambrosi, an economist at Standard Bank, said:

"We expect a cut of at least 1 percentage point and even as much as 1.5 percentage points. The market will be very disappointed if nothing comes of it."

The Reserve Bank was "falling behind the curve" in terms of bringing interest rates in line with inflation, she said.

A further delay might close the window of opportunity as inflation started rising with a pick-up in the world economy.

Pieter Haasbroek, the group economist at Barloworld, said the downswing in the manufacturing and the export sector of the economy had finally hit home.

"The government had prided itself on turning the motoring sector into a vibrant export business and would like to see this maintained."

Dawie Roodt, the chief economist at Efficient Group, said the Reserve Bank should guard against cutting rates too aggressively as this might reduce the likelihood of South Africa moving into an environment of sustained low inflation.

Arthur Kamp, an economist at HSBC, said:

"There is room to cut rates by between 1.5 percentage points and 2 percentage points by the end of the year. But that would be the bottom of the interest rate cycle."

Brait economist Colen Garrow said the statement released by the MPC after the meeting would be critical to determine whether there would be cuts after today. 

"We will also be guided by what happens to the rand. There is no point in having a strong currency when manufacturing, exports and government's finances are under pressure.

"The current account deficit is being financed by volatile portfolio flows and, if this dried up, the rand would again come under pressure."

Roger Baxter, the chief economist at the Chamber of Mines, said real interest rates, which accounted for inflation, were still too high, making the cost of capital higher than it should be.

Rian le Roux, the head of economic research at Old Mutual Asset Managers, expected a 1 percentage point cut or "why have the meeting?"

The strong rand might also be a topic of discussion.

"Everywhere else in the world they are trying to prevent their currencies strengthening and here we are going in the opposite direction."

"Be careful what you wish for. It is not impossible that the rand becomes too strong and the world economic recovery passes us by," he said.

Le Roux added:

"Should the rand move to R8 a dollar it will make little difference to inflation as oil and food prices have cooled off."

Neva Makgetla, an economist at Cosatu, expected a 0.5 percentage point cut although "inflation is definitely on a downward trend and the Reserve Bank can risk making a more aggressive cut".

Cees Bruggermans, the chief economist at FNB, did not expect the central bank to discuss a fundamental shift in its currency policy but that it would more than likely bring forward its interest rate cuts.

Independent economist Noelani King-Conradie pointed out that the Reserve Bank had changed interest rates during previous intermeeting gatherings, including January last year, when they were hiked 1 percentage point, and November 2001, when they were cut by 50 basis points.

"Rates surely can not go up at this stage, so market expectations of a cut seem logical. Should rates stay unchanged, one has to question the Reserve Bank's communication," King-Conradie said.