Market expects big rate cut

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Johannesburg - South Africa's money market is expecting 300 basis points worth of rate cuts in the current loosening cycle, which would take the repo rate to 9% and reach levels last seen in December 2006. The first cut of 50 basis points came in December last year, with the repo at 12% prior to that decision.

For consumers this would translate into a more palatable 12.5% overdraft rate from a current 15%.

Rates were first hiked in June 2006 to 7.50%, with the total tightening cycle amounting to 500 basis points until December 12 last year.

The repo rose as high as 13.5% in September 2002, before receding to 7% in April 2005, with the current tightening cycle then beginning in June 2006.

"A lot can influence this, but including December, I would say there will be at least 300 basis points as inflation comes down from January to March and growth comes down substantially. There will be room," a senior money market dealer told I-Net Bridge.

According to today's data, the 12-month negotiable certificate of deposit (NCD) has weakened just a little from levels seen late last year, but at a rate of 10.000% is seen "close to the top" ahead of the February rates meeting. On December 22, this one-year rate was at 9.700%, but had reached to a worst of 10.025% in the interim period as well.

The short end of the money market is unchanged at 11.350% from the level seen in late December.

"The short end should come down following a 50 basis point cut and there may be a bit of discounting into the lead-up to the meeting," said the dealer.

While consumer inflation in November was reported at a slightly worse-than-expected 12.1%, the new methodology from February and the drying up of demand is expected to push inflation down quicker than expected. Added to this is that the country's growth numbers are expected to be a lot lower, a fact currently being reflected by manufacturing growth at a concerning ?12% on a seasonally adjusted and annualised basis - the worst in over ten years.

The combination of these two factors - low inflation and low growth - should see to the cuts to come.

South Africa's Monetary Policy Committee decides on interest rates again on February 12.

- I-Net Bridge