Mboweni signals the last rate cut

SOUTH Africa’s run of successive rate cuts may have come to an end. Reserve Bank governor Tito Mboweni warned on Thursday that monetary policy ‘has done as much as it can’.

After announcing a one percentage point cut in the official repo rate, he said it was unlikely that the monetary policy committee (MPC) would consider ‘any further significant rate cuts’.There has been a cumulative 4,5 percentage point cut since December, which has taken the repo rate to 7,5 per cent, and the benchmark prime and mortgage rates to 11 per cent.Monetary policy is used to contain inflation, but unions and businesses also see it as a tool to stimulate growth. This often gives rise to friction between the central bank on the one hand, and business and labour on the other.Mboweni attacked cartel and monopoly pricing practices in the food and steel industries, and Eskom’s controversial request for a 34 per cent interim increase in electricity tariffs. He spoke of the ‘need to remove some of the structural rigidities making it difficult to achieve our objective’ of bringing inflation, which was 8,4 per cent last month, back within the 3 percent to 6 percent target range.Azar Jammine, the chief economist at Econometrix, said the bank’s inflation forecast had edged up at each MPC meeting. It was now forecasting 6,9 per cent for the current year, up from 6,1 per cent last month. High inflation reduces the scope for lower rates.In response to a question, Mboweni said the fact that the real repo rate was negative – less than the inflation rate – was one factor in this decision. The other was that monetary policy was forward looking – in other words, the effects of previous rate cuts had still to be seen.In making its decision, the MPC had to balance concerns about consumer inflation against fears about the depth of the recession.But concerns about job losses – 208 000 in the first quarter – and a sharp contraction in gross domestic product (GDP) weighed more heavily. GDP contracted by more than six per cent in the first quarter – a quarterly change that has been adjusted to take into account seasonal influences and annualised (multiplied by four).Two sets of data were released early on Thursday to provide information to the MPC on the second day of its meeting. Statistics SA reported producer prices rose only 2,9 per cent year on year. And the Reserve Bank reported growth in lending to the private sector slowed to 6,58 per cent from nearly 14 per cent in December. Both figures supported the case for a rate cut.Traditionally, rate cuts weaken a currency – one of the reasons Mboweni was reluctant to start the rate-cutting cycle. But the series of cuts since December has not stopped the rand firming from R10,50 a dollar at the start of that month to a best point below R8 on Thursday.The unit strengthened against the euro to R11,2286 Thursday from R11,70 two weeks ago and R15 in October last year. Against sterling, the exchange rate fell to a best point of R12,90, approaching the recent best point of R12,45 early this month. These levels were last seen in the middle of 2006.Recent gains are widely attributed to the proposed merger between local cellular firm MTN and Indian telecoms group Bharti Airtel.After the series of rate cuts, markets anticipate a recovery in certain sectors later this year. The JSE general retailers index, which fell from 38 229 points on March 4 2007 to a low of 16 550 by March 9 this year, had recovered to 21 432.89 points on Thursday. The banks index, which fell from 42 616 points on October 30 2007 and troughed at 22 166 on March 3 2009, closed at 28 741,48 points.Meanwhile, the immediate effect of lower rates is negative for banks, according to Chris Steward, a portfolio manager at Investec Asset Management. He said each one percentage point cut reduced banks’ revenue by between N$400 million and N$800m.This is partly because there is a repricing gap as the rates banks charge borrowers are reset more quickly than the rates they pay on a range of fixed-rate-term investments. Also, when interest rates are high, banks benefit from low-interest-bearing deposits, such as call accounts. The extent of this benefit is reduced when rates fall across the board. -Business Report