Cautious on rate cut
The cost of living for South Africans is soaring, but the lack of economic growth might not prompt the drastic cuts in interest rates needed to help long-suffering consumers, economists said yesterday.

This followed the release by Statistics SA of consumer price index data, used by the Reserve Bank for its inflation target, which revealed an increase of 8.4 percent in April 2009 compared with the previous year.

Danelee van Dyk, Standard Bank economist, said despite the "surprising" gross domestic product figures released on Tuesday, the bank still estimates that the Monetary Policy Committee, which is currently meeting, will drop interest rates by 50 basis points.

"Consumer inflation remains worrisome and it also reflects some pressure on businesses because they can't cut prices," Van Dyk said.

She said that the level of wage demands by unions puts pressure on firms.

"Businesses can't absorb that pressure because most of them are experiencing low profit levels."

T-Sec economist, Mike Schussler, said the MPC might cut interest rates by 100 basis points today.

"We have a problem with inflation and even though there might be a rate cut this month, we might not be able to cut rates further in future."

He said the figures released this week show that "the economy is under enormous pressure".

Doret Els, Efficient Group economist, said the MPC finds itself in a difficult position where there is low growth and interest rates are still high. "It will be difficult to reduce rates heavily because of the lack of economic growth," said Els.

Based on the CPI figures, Els estimates a 100 basis points cut today.

"Thereafter we might see a 50 basis points cut."

Yesterday, hundreds of National Union of Metalworkers members gathered in Pretoria and marched to the Reserve Bank in protest against high interest rates.

The union attributed the loss of about 30 000 jobs in the metal industry to high interest rates.

Business Times

Article by: Kea Modimoeng