As he cut the Reserve Bank's official repo rate by a full percentage point yesterday, governor Tito Mboweni said: "The world has changed radically." He warned: "Nobody must think the cure for the rapidly changing global and domestic situation is just monetary policy."
Pressed on how quickly interest rates might fall, he said South Africa needed more than monetary and fiscal stimulus.
"There is a danger that in the current debate many countries might forget one of the critical issues confronting economic policy is structural change. It would be folly for us in South Africa to forget that we have a lot of work to do in terms of industrial policy and focus only on the financial market crisis."
Mboweni reported that South Africa's current account deficit had fallen to 5.8 percent of gross domestic product (GDP) in the fourth quarter from a revised 7.8 percent in the third. The deficit - the gap between export revenue and import costs - is the lowest since the third quarter of 2006, when it was 5.5 percent. It averaged 7.4 percent last year, reaching a quarterly peak of 9.2 percent in the first quarter.
Mboweni warned, however, that the R17.4 billion trade deficit in January was a sign that the fourth-quarter improvement might not last.
Currency traders paid more attention to the warning than the fourth-quarter figure. After initially strengthening, the rand lost ground to close at R9.4625 to the dollar.
Jeff Gable, the head of research at Absa Capital, said that if the contraction in the current account deficit continued, the risks to the rand would be much reduced.
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The cut in the bank's repo rate to 9.5 percent brought relief to hard-pressed consumers as benchmark prime and mortgage rates fell to 13 percent from a peak of 15.5 percent in December. For a home owner who had borrowed R1 million, it will cut the monthly mortgage repayment by R719 to R11 716. Since rate cuts started in December the monthly repayment on a R1 million loan has fallen by R1 823.
John Loos, a property strategist at First National Bank, estimated the cost of servicing debt at about 11.7 percent of household income, "based on the assumption that the average interest rate on all loans is prime rate and average term of loan is 10 years". However, if capital repayments were included, "the ratio rises to nearly 15 percent".
Mboweni warned the public not to assume that the increase in monetary policy committee meetings from once every two months to once a month meant rates would be cut at each meeting. He again referred to the widening in the output gap - the difference between the potential and the actual output of the economy.
South Africa has 4.5 percent potential for growth and the economy shrank nearly 2 percent in the fourth quarter of last year. In the circumstances, pressure on inflation is much less than when actual growth was more than 5 percent.
It will need cuts of a further 2.5 percentage points to take consumers back to the start of the rate rising cycle in June 2006. Even then, it will be quite some time before consumers recover their confidence and resume spending.
www.busrep.co.za
Ethel Hazelhurst
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