Further rates cuts unlikely this year

Investec believes any further interest rate cuts this year are unlikely.

Investec economist Annabel Bishop says the bank is forecasting a fixed investment growth rate of 7% per annum which, in the absence of significant domestic savings, means the current account is likely to remain in deficit.

"This would be exacerbated by the further importation of military equipment under the SA-Europe Arms Deal," she adds.

"We expect oil prices will begin to decline this quarter and drop back to $35USD/bbl next year. However, should high oil prices persist they would place further pressure on the current account deficit.

"However, FDI and portfolio inflows and additional foreign bond issuance are likely to provide significant inflows on the financial account.

We expect the Euro will remain below 1.25USD for the rest of this year and the first half of next which implies further trade-weighted rand weakness for SA and some ultimate upward pressure on inflation, in combination with further petrol price hikes.

"Consequently, we retain our forecast that interest rates will stay on hold this year, with an expected 50bp hike in February 2006," Bishop adds.

She says however that interest rates are already low enough to stimulate private sector capital investment and with government and
parastatals continuing to upgrade and expand SA's infrastructure, SA is likely to remain dependent on capital equipment imports and hence Euro sensitive.

Article from: www.sundaytimes.co.za