Return to rate rise

While another rate cut of 50-basis-points should be seen at the end of this month, there may not be any more cuts after that with the prospect also emerging that interest rates may gradually move upwards again next year, said a leading economist on Thursday.

Chief economist at Econometrix, Dr Azar Jammine, says that long-term rates have already started anticipating this as the key rate is up around one percent in the past few months.

"Some say this is because of increased government borrowing. I think it is because of the correlation with long-term rates with the rest of world as international investors begin to anticipate the after-effects of this huge stimulus in terms of inflation over time," says Jammine.

He thus feels the long-term interest rate will continue rising and eventually increase in line with short-term interest rates.

Jammine is also concerned about the ability of consumer inflation in SA to remain within its 3-6 percent target band once it does get there in the third quarter of this year.

"It should come down to five percent in the third quarter of this year, but my concern is in the longer term it is likely to creep back upwards to outside of the inflation target," he says.

Jammine points out that the cost of services is rising more rapidly because the price setters of those services looked back at the inflation rate last year and increased their prices. Within this bracket are prices like health tariffs, education costs, hairdressing, recreation and cultural activities.

"You can see the inflation rate has accelerated sharply and prevented CPI inflation from falling faster," he says.

He also notes that the new CPI has assigned a higher, rather than lower, weighting to services.

"Remember for the soccer World Cup many businesses will try and exploit the situation, for example, hotel prices are already up over 10 percent," he says.

Jammine is more confident in the resilience of the SA economy than many others and sees 0.6 percent growth this year, rising to 3.8 percent next year. He sees the rand potentially going to eight per dollar by the beginning of next year as capital has started flowing back to SA.

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Article by: Evan Pickworth - www.iafrica.com