Rates may remain unchanged - economist

The Reserve Bank, which raised the lending rates by a further 50 basis points to 11% when it last met in December 2007, has raised lending rates to commercial banks by a cumulative 4% in the last 18 months.

“It is going to be a very tricky decision for the Monetary Policy Committee (MPC), but it is a lot easier for them to justify leaving rates unchanged,” Lamberti told BuaNews on Wednesday.

He explained that growth has slowed considerably already, and with state owned power utility, Eskom, struggling to meet electricity demand placing constraints on economic growth, an increase in interest rates would do more harm than good.

Another substantial indicator likely to weigh heavily on the decision of the MPC when they meet again at the end of January 2008 is the United States (US) Federal Reserve's decision on Tuesday to cut the 4.25% interest rate by 75 basis points.

The three quarter of a percentage point drop by the Federal Reserve has brought some reprieve to US home owners grappling with a plummeting market.

“US home owners are dealing with a negative wealth effect where equity has retreated into negative territory,” he said.

There is debate among analysts as to whether the US market has slid into recession.

Lamberti pointed out that the textbook definition of economic recession is two negative quarters of the Gross Domestic Product (GDP) growth.

Global economic impact

Whether the US is in recession or not, is therefore up for debate as the second quarter figures will not be out till later this year.

The question many South Africans could be asking is how do problems in the US housing market affect us?

“The US is the biggest consumer in the world, and when their demand slows down [due to a lack of liquidity] everyone suffers because their demand for imported goods from around the world decreases,” said the economist.

Returning to South Africa's shores where investors are reeling, as the Johannesburg Stock Exchange (JSE) registers some of its greatest loses in recent times.

“The All Share Index (ASI) this year began at 29,263 points. The ASI is currently sitting at 25,643, which is 12.4% down since the start of the year, and since the JSE closed on Friday we have dropped 3.4%.

“We think we have entered a bear market period which doesn't bode well for stocks. Over the last few days we've seen a large sell off but this is rarely sustainable, it is likely we are going to see a bounce but its going to be short term,” he said.

Lamberti said three key levels of the ASI which will feed into each other in a downward trend is 22,400 points, then likely to breach the 19,600 level, followed by the 17,000 level.

If the ASI drops to 19,000 points, the JSE will have dropped 27% from the year's initial levels.

The Reserve Bank's Consumer Price Index excluding mortgage costs (CPIX) - which is set to peak near 9% next month - has consecutively breached the Bank's 3 - 6% inflation target band eight times.

Article published courtesy of BuaNews