Benign inflation readings, softer than expected GDP growth and global growth concerns may have opened the door to a potential rate cut later in the year, says leading private client wealth manager BoE Private Clients.

"Reserve Bank Governor Gill Marcus indicated at a previous MPC press conference that there was a clear preference for stable interest rates.  As a result, we are not convinced that the MPC will cut interest rates this week," says BoE Private Clients Economist Madalet Sessions.

However she says a cut could become reality towards the end of the year, especially if inflation came in below expectation or growth disappointed, or if it became likely that either of the developments could be in the offing.

"Additionally, while the Forward Rate Agreement (FRA) market does not price rate cuts from the SARB at this week’s meeting,  the probability of a rate cut priced in the FRA market rises toward the end of the year," says Sessions.

She says that the general uncertainty around global policy and growth continues to negatively affect domestic growth while domestic inflation is still a concern (while the higher food prices of early 2011 are already accounted for in the base, the drought in the US could have negative impact on food inflation outlook). 

"However, generalised pricing pressure is not a major threat at the moment, unless in the unlikely event that the rand sells off while other prices remain flat or rise. Higher inflation, the result of either rand depreciation or higher international food prices, could result in additional weakness in household spending as households’ purchasing power is eroded."

Sessions says that, with uncertain global growth prospects, the best SA can do is to become more focussed on encouraging domestic growth.

"There are a number of policy initiatives that could encourage domestic growth, but for a variety of reasons these are not particularly likely; think of labour market reform, infrastructure development, reforming administered pricing, tax reform to encourage investment, and so forth. 

"As such, 'easy' support for the economy should come from easier monetary policy.  This will encourage domestic consumption, a factor that a number of policy makers and private sector economist are concerned about. However, when consumption demand is in short supply you should do what you can to support what you have.

Article continues on page two: On Adam Smith's Wealth of Nations and Mike Schüssler's dire prediction of an era of economic stagnation...