Politics weighs as Reserve Bank mulls rate cut

The weak economy requires an interest rate cut‚ but the Reserve Bank's monetary policy committee may be reluctant to announce one when it meets this week.

Economists said the bank might not want to be seen to be bowing to political pressure to boost economic growth through lower interest rates.

There would be no repeat this year of last year's significant drought-driven increase in food prices‚ while the stronger rand and the recent drop in fuel prices also helped to ease inflation back into the Reserve Bank's 3%-6% target band‚ they said.

Interest rates were last cut in July 2012. Consumers and investors will know on Thursday whether a new easing cycle has begun. "We have a very weak economy that warrants rate cuts‚" said Nazmeera Moola‚ economist at Investec.

Economic growth contracted 0.7% in the first quarter of the year‚ plunging South Africa into a technical recession. Growth is projected to be less than 1% for the year.

But global and local political uncertainty‚ coupled with the chance that interest rates globally are set to increase and attract portfolio flows out of emerging markets‚ may also contribute to a reluctance to cut rates‚ Moola said.

She said threats to the Reserve Bank's mandate and political pressure were not "big enough to drive the decision all by itself‚ but in a situation where the economics provide the backdrop‚ this is yet another factor".

This week‚ in court papers filed in the Pretoria High Court‚ Reserve Bank governor Lesetja Kganyago said public protector Busisiwe Mkhwebane's proposed remedial action to change the bank's mandate to include the socioeconomic wellbeing of all citizens‚ exposed her "lack of competency" and fundamental "understanding of the monetary system and the role of central banks".

The bank seeks an order to have Mkhwebane's Bankorp report - which focused on its bailout of Bankorp under the apartheid government - reviewed and set aside.

But even if interest rates were cut‚ further action would be needed to ease the problems South Africa faces.

Moola said interest rate cuts were not going to solve "the ultimate problem because that is about the structural dynamics and that is about the rest of the government providing policy certainty".

Weak economic growth was reflected in a drop in the consumer confidence index during the second quarter of this year after a slight improvement in the previous quarter.

The "economic outlook" subindex of the FNB/BER consumer confidence index dropped to -22 in the second quarter from -1 in the first quarter following President Jacob Zuma's cabinet reshuffle and the credit rating downgrades.