If global banks cut rates, SA may well follow
By Stephen Gunnion
From Business Day
SA may join in the next round of co-ordinated interest rate cuts if other central banks trim lending rates again to try to stimulate growth and prevent a global recession, First National Bank (FNB) chief economist Cees Bruggemans speculated yesterday.
Speaking at a panel discussion at the Gordon Institute of Business Science, he said the country would probably prefer to "go with the herd" than "stick out like a sore thumb".
Earlier this month central banks in Asia, Europe, the US and Australia cut interest rates to help stimulate the global economy following the financial crisis. Yesterday, India's central bank joined in, cutting interest rates by 100 basis points, the first reduction since 2004.
There are hopes of further co-ordinated interest rate cuts by central banks to help offset the expected slowdown.
However, the South African Reserve Bank held rates steady at the latest meeting of its monetary policy committee this month, saying the rand's depreciation posed a threat. SA's financial system had remained stable in the face of the global turmoil, Bank governor Tito Mboweni added.
However, Bruggemans said, while inflation posed a risk, high interest rates would erode economic growth.
The rand's steep fall last week has raised the red flag for inflation and is expected to cut into the benefits of the weaker oil price. Bruggemans said the rand was now 30%-40% undervalued and could become a lot more so before it improved.
But he noted that other emerging market currencies had also fallen sharply.
Nedbank chief economist Dennis Dykes told the forum that the currency was likely to recover, although probably not to previous levels. He expected the dollar to weaken in the longer term as it lost its safe haven status.
FNB CEO Michael Jordaan said that while it appeared that large corporates were reining in spending on large capital projects in response to the global slowdown, the government would act as a "shock absorber" as it continued spending on projects such as the 2010 Soccer World Cup and other infrastructure.
Market commentator David Shapiro of Sasfin Securities said the market was keeping a "keen eye" on how SA-listed companies were handling the crisis. While companies had been reporting exceptional results, the concern was how profitable they would remain in the face of a global slowdown.
"If we produce the profits of last year, then the market is very cheap," Shapiro said.