Today there are many people interested in the interest rate decision of the Monetary Policy Committee (MPC). An important question is “who makes this decision (about interest rates) and what are their interest”. Many South Africans have higher repayments on loans that are choking their personal cash-flows. Some people may be hoping for a Christmas present, but is Tito Mboweni father Christmas? Many of the fundamental functions of the economy are linked to the interest rate and it is in government’s best interest to control this function of the countries economy. Government does this by providing a mandate for the reserve bank.

The South African reserve bank (Governor Tito Mboweni) has a mandate to keep inflation lower (between 3 and 6 percent). An average man would think that the mandate should be changed to “lower interest rates” or think that the reserve bank is against them. Certainly the bank looks out for the interest of the economy. They do this by a number of functions which can be found on their website. These include determining the interest repurchase rate. This is a tool that controls consumer spending, because the lower the interest rates the more consumers borrow and spend. This spending is money coming into companies and impacting the economy. As inflation has risen the MPC has raised rates since April 2005. WE EAGERLY AWAIT TODAYS VERDICT.

Some good news for consumers, Inflation came in at 12.4% in the month of October compared to its 13% level for September 2008. This could just signal that a rate cut may not be too far away. Inflation hit a peak of 13.6% in August but now it looks like it is starting to head towards the central banks target of having inflation being between 3 - 6%. But still this rate of 12.4% is relatively high but there is hope it can decline further in December and January when the fuel prices are expected to come down. So now it is just a matter of waiting to find out if the central bank decides to cut interest rates next month. That would surely be a great Christmas present for consumers in South Africa.

We may be in for a bit of a Christmas cheer come December 3 when the The department of minerals and energy (DME) could cut the price of petrol by R1.65, provided the daily over-recovery remains at or above the November 21 level. This would mean that the price of petrol would have dropped by R3.39 since the price peaked at R10.70 a litre in Gauteng in July. The petrol price was cut by 30 cents per litre in August, 74 cents in September, 25 cents in October and by a further 45 cents in November. As long as the world oil prices remain at the levels they are and the Rand does like wise we should be in line for a petrol price cut next week.

The rand lost ground today (Tuesday) after Standard & Poor’s joined the chorus of concerns about South Africa’s current account deficit in cutting its outlook to negative from stable. Announcing the outlook downgrade late on Tuesday, Standard & Poor’s credit analyst Remy Salters said: “The outlook revision reflects pressures on South Africa’s balance of payments, which increase the risk of further currency depreciation and a sharper-than-anticipated correction in the current account deficit, with attendant effects on prospects for trend growth and fiscal outturns.”

This news does not bode well the the South Africa economy. Any negative sentiment in the markets is not good. At 18:00 the rand was bid at R10.3010 to the dollar from a previous close of R10.0050. It was bid at R12.9416 to the euro from a previous R12.7555 and at R15.9119 against sterling from R15.6521 before.

For the first time since September last year, the rate of inflation in South Africa has gone down. Statistics SA said growth in CPIX, which leaves out mortgage costs, slowed to 13,0% year-on-year last month (September) from an all-time high of 13,6% in August. This is an indication that price pressures are starting to ease.

Some analysts are thinking that inflation peaked at 13.6% and we should start to see it continue to drop over the next couple of months. But one thing to consider is the strength of the rand. If the rand continues to weaken it will put further pressure on inflation. The rand has shed about 35% versus the dollar since the start of the year. It traded at around R10,3350/$ in early trade, compared with R10,34 just before the data was issued. Inflation is expected to fall by about two percentage points in January next year when the consumer price index (CPI) is rebased and reweighted. The CPI replaces the CPIX as the targeted measure of inflation from next year.

With the expected lowering of the rate of inflation, does this mean we could be inline for interest rate cuts? Let’s hope so.

With the current financial chaos gripping the markets the world over, we may have a bit of relief on Friday in South Africa when the Central Energy Fund releases the latest petrol and diesel prices. The price of petrol could drop by 35 cents according to predictions from analysts whilst diesel could go down by 20 cents a litre. The prices could drop because of the falling world oil prices but we may not get the full benefit of these falling prices because of the weakening of the rand against the US dollar.
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After todays Reserve Bank monetary policy committee meeting, it was decided that the key repo rate would remain unchanged at 12% whilst the prime lending rate remains at 15.5% in South Africa. This following on from interest rates being slashed by most major central banks across the world inorder to inject some liquidity into the under pressure markets. South Africa, however, did not look set to follow suit as it does not suffer the same banking difficulties that the United States and Europe face and therefore didn’t need similar remedies, analysts told Reuters.

Reserve Bank governor, Tito Mboweni, was however not too sure how inflation in South Africa is going to pan out in the next couple of months. Mboweni forecast a moderate improvement in the inflation outlook and said it was expected to peak at an average 13.3 percent in the third quarter of this year but inflation hit the 13.6% mark in August this year. It may seem hard to see the rate of inflation coming back down to the target of 3-6% anytime soon but analysts are predicting this target to be reached in the second half of 2009.

For now its a matter of ‘play it as it is’. Interest rates could have gone up because of rising inflation or they could have gone done following the worldwide economic crisis but they remain as is.