Possible rate cut on the cards

Thursday, November 11, 2010

Pretoria - A rate cut is possible at next week's final meeting of the Reserve Bank's Monetary Policy Committee meeting, the Bureau for Economic Research (BER) said on Thursday.

"Recent events (including further job losses in quarter three of 2010, the continued rand strength versus the US dollar and the explicit focus on accommodative monetary policy in government's new growth path initiative) have tilted the scales towards another 50 basis points reduction," said the BER in a statement.

The research body, whose clientele includes the Reserve Bank, said whether there was a reduction in the repo rate or not, the forecast would remain fairly stable for the next 12 months, with a moderate (150 basis points in total) tightening cycle projected through 2012.

December 2008's cumulative interest rate relief to date has come to 600 basis points, with the prime interest rate down to 9.5 percent (a 30-year low). The repo rate currently stands at 6 percent.

The central bank will hold its last MPC meeting next Wednesday and Thursday.

The country's Gross Domestic Product (GDP) growth outlook for 2010 is expected to be around 3 percent due to high levels of unemployment, soft global growth environment and rand strength dampening the projected export recovery.

"As a result, GDP growth for the 2010 calendar year is expected to be around the 3 percent mark," said BER senior economist Hugo Pienaar.

According to the BER, GDP growth in 2011 could be slightly better than in 2010. Any improvement is expected to be marginal to 3.4 percent.

On the issue of the rand exchange rate, which is benefitting from large foreign capital inflows to emerging markets (including South Africa), the BER has adjusted its currency forecast.

"We have made a large adjustment to the currency forecast and now see the rand averaging around R7.50 /$ (previously R8.45 /$) in 2011 quarter four and just above R8/$ in the final quarter of 2012," said the BER.

The rand is expected to weaken over the next 24 months once developed countries' interest rates start to rise, as this will slow down the flow of capital to emerging countries.

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