A surprise rate cut in line with a concerted global move by central banks can't be discounted as South Africa did cut rates after 9/11 in conjunction with the US, notes chief economist from Investment Solutions, Chris Hart.

"It would be very inappropriate. My suspicion is it would be the wrong move – the wrong thing at the wrong time," he adds.

"Yes, you could see a re-rating and improvement in the rand, but you could also see a de-rating. We don't know what it could spark at this stage, also in the political context," he explains.

An article in Business Report on Tuesday said that in a desperate attempt to restore stability to financial markets, at least nine central banks are likely to synchronise interest rate cuts within 10 days. South Africa's central bank announces its decision on Thursday.

100-basis-point cut

Australia's central bank got the ball rolling as news hit the wires this morning of their surprise 100-basis-point cut in the face of high inflation.

"Australia is taking a huge chance – their import penetration is high, so inflation could move higher and there could be a fall in the Australian dollar," notes Hart.

"It is the same here, where have a high import penetration and risk inflation being higher for longer," he says.

"The rand is also quite a lot more important to inflation than fuel etc," he adds.

Hart is also concerned about cutting at a time when the repo rate is negative in real terms – the first time that has happened in the 12 years since the country has been using the measure.

Hart notes that there is still concern that the target may be abandoned in light of political changes in the country.

He says this all affects the long-term inflation outlook, which moves up, which means assets like bonds have been priced incorrectly, resulting in shifts in discount factors upwards.

"Inflation expectations are anchored at the middle of the 3-6 percent target range," he points out, noting that central bank governor Tito Mboweni has appeared to be keen on anchoring inflation expectations.

Hart, however, also points to the flipside of the argument – that the SA economy is headed for a hard landing, where the "tent poles" holding it up start falling down.

Risk of recession

"Three months ago we had construction, commodities and agriculture as the tent poles, now commodities have fallen and construction could also if we have project cancellations. Certainly, there could be losses in the platinum sector. There is a risk of recession," says Hart.

"But the wrong thing to avoid a recession is through a consumer binge via cutting rates as it creates further imbalances," he adds.

"So we are on quite a contorted road," emphasises Hart.

"However, the repo is not the right tool to fight inflation. Firstly, it has to compensate you for inflation — then you take an additional bit for risk – but we are not even compensating for inflation," says Hart.

"Personally, I would enjoy a rate cut enormously, but my suspicion is it is the wrong move," concludes Hart.

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