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By Zweli Mokgata | Jan 26, 2010 | COMMENTS [ 0 ]

WHEN the Reserve Bank's monetary policy committee decides on interest rates today its historic mandate of inflation targeting will come under severe scrutiny.

Since the onset of the global economic downturn almost a million South Africans lost their jobs and homes last year, leading to calls by trade unions and leftists for state intervention in the bank's policy.

Yet in a recent poll by Reuters, 23 out of 26 economists predicted that the SARB would keep the repo rate at its current level of 7percent.

Along with Cosatu, which recently called for a 200 basis points cut in the repo rate, three institutions - Brait, Macquarie and Bidvest - also urged the MPC to lower the rate.

Brait economist Collen Garrow said: "Interest rates are too high and we are running out of time before an electricity tariff increase, petrol and food price increases take effect."

Garrow said the repo rate was 1percent higher than it should be.

"We should have cut much earlier, especially when considering last week's disappointing retail sales statistics," he said.

Malcolm Charles of Investec said the SA economy was recovering much slower than other countries with lower interest rates.

"Retail is about 30percent of our GDP and (a rate cut) would be good to stimulate consumer demand," Charles said. "There is no reason to keep rates this high as inflation is to remain well behaved during 2010."

He said there was scope to cut the repo rate by 50 basis points while keeping consumer inflation within a 3percent to 6percent range.

Tendani Mantshimuli of Standard Bank, and Efficient Group economist Merina Willemse, however, felt that the MPC should leave interest rates unchanged.

There has been increasing political pressure recently for changes to the Reserve Bank policy.

These include calls to nationalise the bank, to further lower interest rates, and to broaden its mandate to look at other indicators besides inflation - such as employment levels.

Mantshimuli said: "I think hard data will win on the day. Their mandate is still inflation targeting."

Willemse added: "While the November/December retail sales were disappointing and the economy seems to be lagging behind, we think the repo rate is already quite low.

"With a current inflation level of 5,8percent, we are sitting with a real interest rate of 1,2percent. It may be true that low interest rates stimulate spending, but we also have high unemployment and debt levels."


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