beyondbrics

By Simon Mundy in Johannesburg

A wide-ranging economic report on South Africa by the OECD provoked lively debate in the country this week – but it seems to have made little impression on the Reserve Bank, judging by its decision yesterday to keep the benchmark interest rate on hold at 6.5 percent.

Echoing the concerns of business groups and the powerful trade unions, the OECD on Monday called for intervention against the unusually strong rand, and said there was scope for a rate cut to boost productivity. Not for the moment, said a statement from the monetary policy committee after its unanimous decision, emphasising the need to keep inflation within the 3 to 6 percent target band. It has cut interest rates by a total of 5.5 percent since the economy hit tough times in late 2008.

“There is no point in having a weaker currency if the benefits are simply eroded by inflation,” said the MPC. It left the door open for a cut in the near future, however, saying it was conscious of the “fragility and vulnerability” of the country’s economic recovery.

South Africa emerged from recession in the third quarter of last year, and the Reserve Bank expects growth this year to reach 2.9 per cent. But concerns for the strength of the recovery are growing: manufacturing activity fell last month for the first time since October, and business confidence has been shaken by recent uncertainty in Europe.

“Our sense is that the economy has lost some momentum,” Nedbank chief economist Dennis Dykes told beyondbrics. The interest rate-slashing last year should have gone further, he says, but now the moment may have passed: to be fully effective, rate cuts must come through a sustained programme. He expects the benchmark rate to stay at its current level for the rest of the year, although possible international economic turmoil could prompt a rethink.

Standard Bank economist Danelee van Dyk agrees, saying the Reserve Bank will continue to resist political pressure to focus more on growth and job creation. “They tend to be stubborn when it comes to their views,” she says. “The recovery is still on track according to their forecast, and conditions will have to deteriorate significantly for them to consider cutting interest rates.”

So perhaps the OECD will prove its worth – in the end.