Why rates should be cut in December: Investec

Malcolm Charles, portfolio manager at Investec Asset Management argued for a rate cut in December in an article written by Garth Theunissen and published on Bloomberg.

Current interest rates are 12 percent, the highest level in more than five years. This is against a backdrop of slowing of both consumer spending and credit demand.

According to Malcolm Charles, inflation is dead and is going to surprise on the downside all the way down. The reason inflation spiked in South Africa was because of the exogenous shock of higher food and fuel prices. With oil prices having plunged that exogenous shock is now working the other way around.

'The world economy is heading for recession and commodity prices have plunged, which means South Africa could soon start importing deflation. We're not going to be a lone island of inflation in a world of deflation.

'CPIX inflation will probably come down to about 10.4 percent in December and roughly 7.4 percent in January. It could easily return to target by June next year, when it will probably come in at just below 6 percent,' he said.  

On the timing of a possible rate cut he is quoted as saying that people who say the central bank would be sending the wrong signal if they cut interest rates in December are totally missing the gravity of the global economic slowdown.

'Inflation has been beaten locally and globally. There is no more pricing power left anywhere in the world. The downward drift in food and fuel prices is going to be enormous over the next six to nine months. Monetary policy should be forward looking. If the central bank waits until inflation returns to the target, this economy is going to fall into a recession. Monetary policy is a 12- to 18-month tool. Even if you're a purist in terms of your application of inflation targeting, December would still be an appropriate time to cut rates,' he said.

Discussing the need for the need for an interest rate cut he said that the need to avoid a recession was more important than inflation targeting.

'South Africa has the opportunity to buck the global trend and show investors that we've come of age. By supporting economic growth we will attract foreign capital inflows back to South Africa. Sooner or later investors are going to get tired of earning zero percent at home and start looking for growth.

'Now isn't the time to be pedantic and academic. The economy needs bold vision,' he said.