The weaker rand combined with above-target inflation suggests that South Africa's central bankers are unlikely to cut interest rates until well into next year, says Moody's Economy.com on Friday.

This comes a day after the Monetary Policy Committee decided to keep rates on hold at 12 percent, and today's Moody's Economy report is entitled: "The Odd Man Out on Interest Rates".

South African bonds had strengthened on Monday when news broke that Australia had cut rates by a surprise 100-basis-points in the face of inflation pressures, but also a global crisis. Further fuel to the fire was added when news that a coordinated rate-cutting strategy was taking place around the world, with the UK, US, Canada, Eurozone, Sweden, Switzerland, China, Hong Kong, South Korea and Taiwan all cutting by differing amounts.

Middle of road

Talk then arose that South Africa might well join them on October 9, but this was not to be, with our central bank taking the middle road and keeping rates on hold, pointing to the weak rand as a new concern on the inflation front.

Most analysts think this was the right choice, while others are not sure about the reasoning and some feel a cut should have happened.

Moody's Economy says: "As such, the country's businesses and consumers will continue to struggle under the weight of high interest rates in coming months. The economy has peaked and has entered a protracted period of below- trend growth. Considering the mounting headwinds facing businesses and consumers, the risks to the economic outlook remain firmly weighted to the downside."

"Despite the escalating credit crisis — which this week prompted an extraordinary round of coordinated rate cuts in North America and a number of countries in Europe and Asia — South Africa's monetary policy committee reportedly did not even discuss lowering rates," note the global economists.

The South African Reserve Bank's targeted annual inflation gauge, the CPIX, surged 13.6 percent in August, more than double the upper limit of the bank's three to six percent inflation target range.

"Despite the improvement in the medium-term inflation outlook, SARB Governor Tito Mboweni cited fresh concerns about recent exchange rate movements," they note.

Rand punished

Since mid-September, the rand has been punished. Heightened risk aversion has prompted a massive withdrawal of foreign funds from a wide range of emerging market assets. During the last month, the rand has shed around 10 percent against the dollar, recently breaching the psychologically important $9 level for the first time in almost seven years.

"Since the start of the year, the rand has shed around a third of its value against the greenback. The country's equity markets have also taken a beating, with the JSE all-share index plummeting more than 20% since mid- September," conclude the global economists.

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