Rate cut possible, say analysts

Johannesburg - It is possible that interest rates could decline even further, although the prime lending rate is currently at a record low.

The Reserve Bank has announced that its net reserves had increased by only $2m or 0.01% to $38.29bn in March.

The lack of activity in the reserve market has made analysts speculate that the bank wishes to control the rand via interest rates rather than the accumulation of reserves. Gold reserves rose 0.3% to $4.47bn and gross reserves were 6.5% up, at $42.01bn.

During March, the rand strengthened 5% and, according to Standard Bank economist Shireen Darmalingam, the expectation had been that the Reserve Bank would build up reserves.

Buying foreign reserves is generally regarded as one of the simplest ways the Reserve Bank can weaken the rand.

Reserve Bank governor Gill Marcus told Sake24 that the bank was aware of the problems created by the strong rand, and that it would therefore acquire reserves when and where possible.

Rand strength is partly ascribed to the carry trade, since South Africa's relatively high interest rates, compared to those in developed countries, make it profitable for foreign investors to invest their money here.

Low domestic interest rates could make South Africa a less attractive investment destination and constrain inflows of foreign exchange, and therefore the strengthening of the rand.

Ion de Vleeschauwer, chief currency dealer at Bidvest Bank, told Bloomberg on Friday that the Reserve Bank had done nothing in March to build reserves and it appeared that the bank wanted to control the exchange rate via interest rates.

Rand Merchant Bank (RMB) currency strategist John Cairns said there's also a possibility that the bank could react to a further strengthening of the rand by again cutting rates.

But he said this would happen only in the event of a further and sustained 5% to 10% strengthening in the rand's trade-weighted value.

Retail sales numbers could rise

RMB also expects inflation to fall to about 4.5%, which will create a favourable interest rate environment.

Inkululeko Media and Marketing Reserve Bank chief economist Monde Mnyande said the recent lowering of the repo rate had shown that fluctuations in the rand's nominal trade value had not been affected by the bank's repo rate policy decisions.

Since March 25, when the repo rate was lowered half a percentage point, the rand has strengthened 2.5%.

Apart from the strong rand, the apparently sluggish recovery in some parts of the economy could possibly also justify a further lowering of the interest rate.

The February manufacturing index published last week by Statistics South Africa showed a considerably smaller year-on-year (y/y) rise than expected, and month-on-month it declined 1.5%.

Retail sales figures for February, due out on Wednesday, could give a further indication whether economic recovery, particularly among consumers, has the necessary thrust.

RMB economist Carmen Nel expected February retail sales to show y/y growth for the first time in 12 months thanks to higher real income, stabilisation of the labour market, lower costs of servicing debt, declining food prices and increased consumer confidence.







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