South Africa should not be thinking of cutting interest rates with prime interest at 15.5 percent and input costs at 19 percent, says chief economist from Econometrix, Dr Azar Jammine.

This comes one day before the rates decision locally and news of co-ordinated efforts by big economies around the world to cut interest rates.

"Business will be faced with higher costs than people are anticipating," says Jammine.

He notes that higher wage demands of 12 percent to 15 percent will be entering the economic system in the year ahead, but there are also knock-on effects of higher inflation still feeding through to the rest of the system.

He says while inflation will fall dramatically, it will then get "bogged down" at above the six percent target – around 7/8 percent - "for a long time".

He says higher wages will help stabilise the slowdown in consumer spending, with people using some of it to retire debt and improve their financial positions, with consumer expenditure gradually picking up.

Foolhardy to raise rates

He says real prime rates are already low in SA and are only high when compared to 1986.

"It would also be foolhardy to raise rates," he adds.

Jammine is not part of the majority view, which sees rates dropping in February or April next year and instead feels this will only happen in the second half, if at all.

On CPIX having peaked at a current high of 13.6 percent, Jammine feels September may take it even higher as further electricity municipal hikes feed through.

"There may still be some municipal tariff increases – then August was not the key, but September," he explains

Jammine is also concerned about the effect of the new weights to CPIX to be implemented from next year as while they reduce the food and increase vehicle components based on 2005 spending patterns, this happens at exactly the wrong time – when food prices decline and vehicle inflation rises.

"Vehicle inflation should rise as the rand falls against the euro and yen," he explains.

On 14 August the South African Reserve Bank's (SARB's) Monetary Policy Committee decided to leave the repo rate unchanged at 12.0 percent.

Consensus is for rates to remain unchanged

The prime overdraft rate thereby remains at 15.5 percent and the current tightening cycle, which began in June 2006, at 500 basis points.

The consensus is for South Africa's repo rate to remain unchanged at 12 percent in October and for the first rate cut to take place in April next year, according to a survey of leading economists by I-Net Bridge.

The South African Reserve Bank's (SARB's) Monetary Policy Committee began its two days of deliberations on Wednesday next week, with the final decision due at around 3.10pm on Thursday.

The JSE followed world markets firmer as global bourses reacted favourably to news that there had been a co-ordinated interest rate cut by the European Central Bank and the US Federal Reserve.

At 1.15pm the JSE all share index was 0.5 percent lower, after being down three percent an hour ago.

The US Federal Reserve and the European Central Bank announced a 50 basis point rate cut.

The European Central Bank cut its main lending rate by half a percentage point to 3.75 percent. The decision was taken in coordination with central banks in Britain, Canada Sweden, Switzerland and the United States, the ECB said.

The rand was also firmer, last quoted at 9.1896 per dollar compared with 9.4269 just before midday.

I-Net Bridge