Bloomberg News

South Africa Pressed to Cut Rates as Rand Worries Gain

June 11, 2012

South Africa’s economic recovery is losing momentum as mining and manufacturing slumps, fueling investor expectations of an interest rate cut that the central bank has so far resisted.

Mining output contracted for a 10th month, manufacturing nearly stalled in the three months through April and business confidence slumped the most in four years, according to data published on June 7. Investors have increased bets the central bank will cut its benchmark rate from 5.5 percent, with yields on the six-month forward-rate agreement dropping the most since September in the past month.

Policy makers from Brazil to China to Vietnam are taking steps to bolster the global economy as the debt crisis in Europe worsens. South Africa’s central bank has so far rebuffed calls to ease borrowing costs as a weaker currency keeps inflation above the bank’s target. Reserve Bank Governor Gill Marcus said on June 7 her mandate is to control inflation and monetary policy is limited in what it can do.

The Reserve Bank will “face more pressure to do something if growth continues to moderate,” Carmen Nel, an economist at Rand Merchant Bank, a unit of FirstRand Ltd. (FSR), said in an interview in Cape Town on June 8. “They would find it very difficult to ignore.”

The chances of a rate cut before the end of the year are rising. Yields on the forward-rate agreement due in December dropped 33 basis points, or 0.33 percentage point, to 5.36 percent in the past month. As recently as March, the contracts were indicating the bank would raise rates this year.

Business Confidence Slumps

South Africa has already cut its economic growth forecast for this year to 2.7 percent, down from 3.1 percent in 2011. It may have to do so again as a possible recession in Europe cuts demand from a region that buys about a third of South African manufactured goods.

Mining output fell 11 percent in April from a year ago, while manufacturing, which makes up 15 percent of the economy, expanded 0.4 percent in the three months through April, the statistics office said last week. The RMB/BER business confidence index dropped 11 points to 41 in the second quarter, signaling a slowdown in economic activity, Rand Merchant Bank said on June 7.

“Consumer confidence is likely to follow and that drives spending,” Gina Schoeman, an economist at Absa Group Ltd. (ASA), said in a telephone interview from Johannesburg. “As things get worse, as people become less confident, you are going to see retail sales lose momentum.”

Resisting Rate Cuts

Retail sales contracted 1.2 percent in the first quarter compared with the previous three months, the statistics agency said on May 16. Consumer spending makes up about two-thirds of demand in the economy.

The Reserve Bank, which has left its key policy rate unchanged for a record 18 months, has so far resisted pressure to ease monetary policy as inflation stays near the top of its 3 percent to 6 percent target range. The inflation rate, which rose to 6.1 percent in May from 6 percent a month earlier, will probably drop into the target band after the second quarter, according to the central bank’s forecasts.

“Monetary policy will face a challenging period ahead, in trying to deal with these risks to inflation against the backdrop of a volatile and uncertain global environment and the implications for the domestic economy,” Marcus said on June 7.

The rand has plunged 9.1 percent against the dollar in the past three months as investors sold riskier, emerging-market assets, adding to import costs and making the currency the biggest threat to inflation, Marcus said. The rand gained 1 percent to 8.3069 per dollar as of 9:27 a.m. in Johannesburg today.

“With inflation expected to return to the target range, and oil prices decreasing, a slowdown in the demand side of the economy would be supportive of an interest rate cut,” Thabi Leoka, the head of South African macroeconomic research at Johannesburg-based Standard Bank Group Ltd., said in a note to clients on June 8.

To contact the reporter on this story: Andres R. Martinez in Johannesburg at amartinez28@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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