Steep rate cut expected next week on 2009-04-24"font-family:'Arial','sans-serif'">Steep rate cut expected next week on 2009-04-24" />
Steep rate cut expected next week

Analysts say cut needed to to boost an economy that looks set for its first recession in 17 years.

(Reuters) - South Africa's central bank is likely to keep its aggressive monetary easing stance next week with a steep rate cut to boost an economy that looks set for its first recession in 17 years.

Financial market turmoil and recession in developed countries have knocked Africa's biggest economy, hitting exports of resources and vehicles, and plunging the key manufacturing sector into a sharp decline.

Manufacturing output fell 15.0 percent year-on-year in February, after a 21.8 percent drop in the fourth quarter of 2008 that dragged the economy to its first contraction in a decade.

Mining production fell 12.8 percent in February while household spending has also tumbled. The three sectors make up over 30 percent of GDP and their continued weakness could see South Africa record its second quarterly shrinkage in a row.

Twenty-six economists polled by Reuters predicted the central bank would reduce the repo rate next week, with 25 seeing a 100 basis points cut to 8.5 percent, adding to 250 basis points worth of reductions since December. One economist expected a 50 basis point drop.

"The economy is relatively weak and the Reserve Bank will respond by easing policy," said Dennis Dykes, chief economist at Nedbank.

"One thing that held them back (before) was that inflation remains sticky. But our belief is that the economy is very weak and to prevent a serious recession from developing they will have to cut," he said, seeing the repo rate at 6.5 percent by year-end.

Headline consumer inflation quickened to 8.6 percent year-on-year in February, staying outside a 3-6 percent target band, partly on stubbornly higher food prices. It had been trending downwards since peaking in August last year.

The central bank said its most recent forecast showed a near-term deterioration in the inflation outlook but a more favourable trend for the medium term, which it says is the relevant time frame for monetary policy.

SMALLER STEPS

The central bank has almost doubled the frequency of its meetings effective from March and will now meet every month this year except for July -- from once every two months previously -- to better respond to global economic developments.

With more policy meetings this year and inflation not declining as fast as previously expected, the central bank could loosen monetary policy in smaller steps from May.

Most analysts polled by Reuters expected the repo rate to fall by up to 3 percentage points this year from the current 9.5 percent, including April's move and a smaller rate cut of 50 basis points in May.

But economist Johan Rossouw said worries over inflation could temper that rate outlook.

"I'm not as optimistic as some of my peers, because inflation is going to be a little bit more sticky than we hoped," said Rossouw, chief economist at Vunani Securities.

"As we move towards the bottom of the cycle there will be a little bit of fine-tuning and that will necessitate small and incremental (rate) changes," he said, seeing the repo at 7.5 percent by year-end.

The central bank's Monetary Policy Committee will meet on April 29-30 and central bank Governor Tito Mboweni will announce its rate decision around 1300 GMT next Thursday. 

 

Article by: Phumza Macanda - www.moneyweb.co.za