Global economic slowdown favouring 2-3% interest rate cut in '09

Economists seem to be in agreement that 2009 is going to be the year for significant interest rate cuts in South Africa.

Driving factors

Driven by a contraction in demand, the significantly lower oil price, which has fed through to quite substantial fuel price cuts lends positively to a lower risk of inflation which the South African Reserve Bank is mandated to combat.

Weakening global demand for commodities such as gold and platinum, however, means less capital is flowing into South Africa threatening not only South Africa's expected Gross Domestic Product (GDP) growth, but also the current account deficit.

Rate decrease expected

In the face of shrinking GDP growth, the central bank is likely to drop interest rates freeing up much needed money to boost the local economy.

The central banks Monetary Policy Committee (MPC) lowered the repo rate by half a percent when it last met in December 2008, which was the first such drop in the interest rate following a number of consecutive rate hikes since June 2006.

“We are likely to see steady interest rate cuts all the way through to the middle of this year ... but there are still possible inflation risks such as a weakening Rand which will make the Reserve Bank cautious,” believes economist at Econometrix Treasury Management (ETM), Russell Lamberti.

Crisis hits home

Lamberti told BuaNews if 2007 was the year the cracks started appearing in the global economy, and 2008 was the financial year of reckoning, then 2009 will be the year when the economic crisis really hits home in the real economy.

“Over 2.6 million jobs were lost in the US in 2008, and it is predicted that the figure will double for 2009,” Lamberti said.

Effectively this means growth and investment in developing economies will be significantly scaled down as investors focus on saving and rehabilitating developed markets.

Rate cut predictions

Director at the Bureau for Economic Research (BER) Professor Benjamin Smit told BuaNews their official forecast is for a 250 basis point or 2.5% cut in the interest rate.

After the successive interest rate cuts, the repo will remain stable for some time, Prof Smit highlighted.

Investment Strategist at Investec Asset Management, Michael Power, similarly told BuaNews he believes there will be an interest rate cut of between 2 and 3% in 2009.

Upbeat inflation forecast

Inflation has been outside the Reserve Bank's inflation targeting band of 3 - 6% since an inflationary cycle began in June 2006, but Sanlam economist Jac Laubscher told BuaNews he believes it will fall below 6% by the third quarter of 2009.

“We believe that inflation will move back below the 6% mark by quarter three of this year which will create room for interest rates to come down by between 250 and 300 basis points,” Laubscher said.

Chief Economist at Nedbank Dennis Dykes believes there will be a cumulative drop in interest rates of 300 basis points, which will bring commercial banks' prime lending rates down to 12% by the end of the year.

“Risks to inflation throughout the year will be the strength of the Rand, administrative prices such as Eskom's increasing cost of electricity, and a possible resurgence in the price of oil,” Dykes explained to BuaNews.

The repo rate, which is the rate at which the Reserve Bank lends money to commercial banks, is currently sitting at 11.5%, while the prime lending rate, which is the interest rate consumers are charged for lending from commercial banks, is presently 15%.

Article published courtesy of BuaNews