Stals's reputation intact as Bank rate is lowered
The long-awaited rate cut will little impact on SA's economic growth, writes SVEN LUNSCHE
Friday's announcement of a drop in the Bank rate from 17% to 16% was finalised only after Central Statistical Service figures on Tuesday revealed a sharp slowdown in inflation at the producer price level.
Commercial banks are set to follow the Bank's lead this week by cutting their prime and mortgage rates by one percentage point to 19.25% and 19% respectively.
Economists are sceptical that the cut will have a material impact on growth for 1998. "I think it's good timing and . . . on the assumption that the Bank rate was going to be cut around now, our growth forecast is still 2.7% for 1998 compared to an estimated 2% this year," Huysamer Stals economist Johan Rossouw told Reuters. Real interest rates - the difference between prime and inflation - are still in the region of 10%, deterring any renewed upsurge in credit expenditure.
A significant boost to the economy will only arise if, as expected, this week's cut is followed by at least two further reductions in the Bank rate in the first half of 1998.
"We're all presuming that this is the first in a series of cuts. But unless the monetary aggregate growth comes down very sharply . . . we are probably looking for the next cut in the first quarter of 1998," Tony Twine of the Econometrix research institute said.
Stals underlined his commitment to a tight monetary approach, saying monetary aggregates, although still outside its guidelines, had fallen sufficiently in the June-August period to justify the action. He was also encouraged by the turnaround in the rising trend in consumer and producer prices. "We are satisfied that a reduction of one percentage point in the bank's lending rates to banking institutions can now be justified." He said greater financial stability would contribute to the stimulation of SA's economic development and the creation of more employment opportunities.
Stals has been under fire for delaying rate cuts at a time when growth was slowing sharply and the government was failing dismally in its bid to create jobs.
Ironically, it is only the Reserve Bank which is meeting its targets under the government's ambitious macro-economic Gear package - namely a steady drop in inflation and a gradual relaxation of exchange controls. In all other respects the Gear targets are beginning to look like a wishlist.
Maria Ramos, finance director-general, expressed confidence, however, that growth in the 1997/98 fiscal year would remain at 2.9%, as forecast, and the budget deficit before borrowing would come in at 4% of GDP.
Figures released this week show that government spending in the first six months of the fiscal year was up by 11.5% on last year, well ahead of budgeted estimates. "We will get a clearer picture of departmental and provincial spending trends in January - if budgets are overrun there will have to be cuts," Ramos warned.
She was adamant that the independence of the Reserve Bank was sacrosanct. Clearly unaware of the imminent Bank rate cut she responded to questions about monetary policy: "Speak to the Bank."