South Africa's central bank will need to loosen monetary policy further if it hopes to revive spending and investment, and further monetary easing is therefore expected in mid-February, says Moody's Economy.com in a research note on Friday.

After this week's abysmal manufacturing release, the Moody's Economy.com economists say that slumping domestic and foreign demand is to blame.

"Despite the weak rand, key export markets are cutting their demand for South African-made goods, while the country's important commodity exports, including precious metals, have also been hit. Meanwhile, elevated interest rates have cooled domestic demand," say the economists.

They add that although input costs are easing, no turnaround in fortunes is expected for the country's industrialists in the medium term.

This comes as the dour manufacturing data dominated the economic releases from South Africa in the past week. Manufacturing output dropped three percent month-on-month and 4.4 percent in annual terms in November. This marked the fifth consecutive month of contraction, while the annual fall was the biggest decline in almost a decade. Factory output accounts for about 16 percent of the economy.

Electricity shortages also remain a threat, according to the economists, and borrowing conditions are still tight. Growth in borrowing by households and companies rose 15.3 percent in annual terms in November, the lowest rate in four years.

"The South African Reserve Bank will need to loosen monetary policy further if it hopes to revive spending and investment," says Moody's Economy.com.

The central bank lowered its key lending rate by half a percentage point to 11.5 percent in December.

"Central bankers had been on a tightening schedule, having hiked interest rates six times since mid-2007. Further monetary loosening is expected through 2009," they say.

The JSE stock index is around 23 percent below its year-ago level and the rand is around 40 percent lower against the dollar.

"Concerns about the sharp slide in the rand since September could prompt the bank to adopt a gradualist approach to monetary easing in the opening months of 2009. However, price growth is showing signs of cooling, and rapidly deteriorating economic conditions call for aggressive interest rate cuts," say the economists.

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