By Alison Maltz
While CPIX inflation is likely to remain in the South African Reserve Bank's 3%-6% target range in 2004, the South African Reserve Bank is likely to keep interest rates on hold, rather than cut in February and possibly have to raise them later, Rian le Roux, head of Old Mutual Asset Management's Economic Research Unit says.
Le Roux told a media briefing in Johannesburg that rising oil prices, rising international food prices and the local drought, coupled with the rand's weakness over the last few weeks, could pose inflationary risks.
Against this backdrop, the Reserve Bank was wise in adopting a cautious approach by only cutting the repo rate by a smaller than expected 50 basis points in December.
Overall, Le Roux is fairly bullish about the outlook for the South African economy.
He says that a sustained global recovery through 2004, a soft dollar above $1.20 to the euro and firm commodity prices should create a favourable global environment for South Africa.
Locally, the rand should also correct to 7.50 to 8.00 per dollar, depending on the dollar-euro exchange rate, by year-end.
"This will not be serious enough to pose a risk to inflation, but it will be good for the real economy," Le Roux asserts.
He cautions of two risks to this scenario, which could derail the economy from its expected course.
A sharp fall in the dollar could drive commodity prices up further and send the rand back towards 6.00 per dollar. Positive sentiment towards commodity currencies would see it firm against the cross currencies as well.
This could send CPIX inflation to the low end of the range and lead to further rate cuts in the second half of the year.
While there would still be a risk of a boom/bust scenario, the bust would be temporarily postponed.
The second risk is of a current account crisis developing as a result of the effect of the rand's strength on the current account being underestimated.
This could see the rand weaken sharply, resulting in rising inflation and rate hikes in the second half of the year.
Le Roux says that the likelihood of this second scenario emerging is to a large extent dependent on commodity prices.
"If commodity prices start to decline, a small deficit can be difficult to finance . . . There is no special level where you can say you have a crisis," he says.
However, if the world economic recovery remains on track and commodity prices remain firm, it is unlikely that a current account crisis will develop.
I-Net Bridge
Publisher: Business Day
Source: Inet Bridge