| Wednesday 19th and Thursday 20th March 2003 sees the MPC meet to decide
on SA monetary policy. The decision is expected to result in rates left unchanged. In a period of such uncertainty it would be in the country's
interests to remain on a stable and certain path. |
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| Analysis
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| As if inflation developments were not enough to contend with, the SARB
will also be mindful of the development of war in Iraq and the economic consequences that
this may hold for the global and indeed the local economy. Keeping interest rates high to
ensure that the ZAR has some support in these uncertain times may prove the most prudent
approach. In the price action of the past few weeks it has become apparent that the ZAR
will struggle to sustain gains against the USD below the 8.0000 mark. Despite the
attractive interest rate differential which exists between SA's deposit rates and those
found in other emerging European countries, the ZAR has lost ground with foreigners
reluctant to enter into new long ZAR positions from current levels. Building a stable
currency platform off which monetary policy can be based would form a strong foundation
and help change the medium to longer-term perception of the ZAR as a one way bet. The
SARB is concerned over the inflationary outlook. January’s CPI data confirmed that
the inflation trend is firmly downward. The concern remains however that the decline is
still taking place too slowly to entice the SARB to cut rates as early as March. |
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| The SARB prefers to adopt a cautious strategy, ensuring that inflation is
under control. Real declines in food price pressures are only expected to filter through
from June, as the wheat and maize futures reflect. Other inflationary concerns remain the
low level of labour productivity and the stubbornly high level of administered prices. On
the former, the concern is that the softening trend is showing no strong signs of rising
with administered price inflation recently given a further boost by the Eskom increase in
tariffs above the upper limit of the target range. Moreover, wage increases that were
secured for 2003 by the labour unions have yet to fully filter through and will do so
later in the year. Given that these will also be above the inflation rate in H2, a further
case can be built for the SARB to leave rates unchanged. Thirdly and more along the lines
of anecdotal evidence are the recent statements by the SARB. SARB Governor Mboweni, has on
two occasions now made the CB's position clear that they will be vigilant in reducing
inflation. In a statement earlier in the year he also made it quite clear that
expectations of a rate cut in March were in fact premature There is also concern over
the outlook for growth. SA's GDP has proved resilient to the global downturn and although
it will slow through Q1 and Q2, the tax breaks given within an expansionary budget could
well counter the detrimental effects of sluggish global demand and the ZAR's recovery.
Until such time as the inflationary effects of this pro-growth budget can be fully
assessed, the SARB could once again prefer a more cautious policy to ensure that a
softening inflationary trend is entrenched. Investors need no reminder that the inflation
targets have yet to be met, and unless this takes place, the SARB will also then face
questions over its credibility in reducing inflation. |
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