South African rate cut hinges on data

Friday, 22 October 2010 03:08 -     - {{hitsCtrl.values.hits}}

JOHANNESBURG (Reuters) - South Africa’s Reserve Bank will “not necessarily” cut interest rates again next month and the decision will depend on the data the bank has, Governor Gill Marcus was on Thursday quoted as saying.

In an interview published in the weekly newsmagazine Financial Mail, Marcus said there were many factors to be taken in consideration when deliberating on interest rates.

Asked whether there could be another rate cut in the November 17-18 meeting, she said :”not necessarily.” She also added: “If the data changes, you may have to change your mind.”

The central bank has reduced interest rates by 600 basis points since December of 2008 to support a fragile economic recovery from the financial crisis and some analysts say it may yet cut further.

Annual inflation has slowed to 4-year lows of 3.5 percent giving room for easier monetary policy.

“I wouldn’t want to be interpreted that we’re soft on inflation because we’re not,” Marcus said. “We’ve got a different environment at the moment and if you have low inflation you’ve got room to look at other things, so I wouldn’t say there’s been a shift.”

Marcus also said tackling the overvalued rand currency required a mix of policies because it was not a “quick fix”. “The challenges are big for emerging markets like ours... and I don’t think there’s anyone in South Africa who would disagree that there’s an overvaluation of the rand at this point.”

The rand has gained over 27 percent against the dollar since the beginning of last year, hurting exporting industries such as mining and manufacturing and contributing to a slowdown in the economy in the third quarter.

“It’s got to be a combination of actions that allow you to respond as appropriately as you can,” Marcus said. “It would be different if it were just a quick in and out, but that’ not what it looks like -- remember, this crisis has already been going for three years.”

Emerging market currencies have rallied on the back of increased capital that is chasing higher yield, in the wake of near-zero interest rates in developed economies. The central bank expects the wall of money into emerging markets to continue.

Other emerging markets such as Brazil have responded by introducing a tax to discourage capital inflows, but South Africa has shied away from such an approach.

Marcus said an interest rate reduction or currency targeting was not the only way to go -- a mix of tools was needed.

“All I’m saying is that in a situation like this... we look at all options: macro and micro, trade and other,” she said, adding a sober approach was needed because the current environment was difficult and unchartered territory.

The bank has said it would not target a certain exchange rate level but would increase foreign exchange reserves when appropriate.

Pic cap: Central bank Governor Gill Marcus gestures as she addresses businesspeople in Soweto, September 2 2010.