Saturday, December 3, 2022

Markets praise MPC rate cut

Markets applauded the Central Bank’s┬áMonetary Policy┬áCommittee (MPC) decision to slash the Bank Rate by half a percent, pointing out that though the move is driven by a falling inflation rate, it will also go a long way in stimulating the wobbling economy.

Embolden by the down sliding of the inflation rate to 6.1ÔÇöjust close to its target of three- to six percent — the Bank led by Linah Mohohlo announced a half a percent cut to 8.5 percent earlier in the week.

“From our viewpoint, we can only read into the implied signals of the recent moves by the Central Bank. Simply put, they suggest that the short to medium term economic benefit of lowering the overall cost of borrowing by a cumulative 100bps in recent weeks outweigh the risks of medium-term inflationary pressures,” an analyst at Afena Capital, a fund management firm, Alphonse Ndzinge said.

His opinion was boldly supported by Garry Juma, an analyst at a brokerage firm Motswedi Securities who said: “The policy response is appropriate given the weaker inflation expectations and the need to boost the fragile local economy.┬á The interest rate cut might be insignificant to individuals, but to large corporations that are highly geared, the monetary savings through a reduction in cost of capital will go a long way in boosting production.”

He added: “Our forecast is that inflation will continue on the downward trajectory till year end and will fall in the 5.9 percent to 4.2 percent range.”

In its decision the MPC pointed out that the global output for this year is expected to be at 3.3 percent compared to 3.2 percent in the previous year.

It said growth is expected to be stronger in the emerging markets compared to the advanced economies which most of them are still reeling under the effects of the global economic crisis ÔÇô especially in the Euro Zone.

“The lower global growth, subdued demand and stable commodities prices have contributed to moderate inflationary pressures,” the MPC said in its statement.

It said some of the reasons that strengthen its view on inflation are that the domestic economy will remain jaded in the medium term.

“Domestically output increased 3.7 percent in the┬átwelve months up to December 2012,┬áwith growth in the non mining sector slowing from 7.8 in 2011 to 5.8 percent in 2012 and the mining sector contracting by 8.1 percent.

“It is expected that output expansion will remain below potential in the medium term and will not be inflationary,” it said.

Ndzinge said recent economic developments and data releases for some of the key components of the Central Bank’s inflationary forecasting framework such as inflation trends particularly in Botswana and South Africa, the Rand/Pula rate and the economic output gap evidently support this view.

“Domestic inflationary pressures are clearly easing with weak domestic demand pressures, imported inflation concerns have moderated given Rand weakness, and expectations for below trend economic output both domestically and South Africa remain. So the moves could have positive implications for short-term economic activity with a view that policy makers have an active agenda for addressing the longer-term structural constraints of the economy such as our ability to accumulate capital, create jobs, and improve productivity,” he said.


Read this week's paper