FNB on possible Rate Cut - 17th Aug 2010

Reportedly, the South African Reserve Bank (SARB) may only consider cutting interest rates if growth takes a (decided) turn for the worse and inflation remains non-threatening, with downside risk.

"Be careful what you wish for, yet much suggests confirmation on all scores", says Cees Bruggemans, FNB's Chief Economist.

Though SARB is forward-looking, the present usually counts for most.

It is in the present that much evidence keeps piling up in favour of a September rate cut, financial markets now for some 70% discounting this outcome.

The latest CPI inflation data of 4.2% suggests a dip into the 3% range shortly, before bouncing back to 4%-6% over the next two years.

That makes the inflation outlook neutral. But growth does count for something as well nowadays. Though SARB and Treasury growth forecasts started the year low (remember the 1.5% GDP prognostications?), they have steadily marched higher since, by mid-year approaching 3%.

A recovering economy and an improving growth outlook are not good ingredients for expecting another rate cut, even when there is much resource slack.

But private forecasters have started to cut back their growth expectations, and may have further to retreat, at some point even affecting public expectations. That might be a different proposition altogether when it comes to interest rates.