Interest Rates remain stable and future of them depends on Eskom.

Eskom trades off against a weak economy

By Cees Bruggemans, Chief Economist FNB
26 January 2010

With the CPI inflation rate close to the upper part of the 3%-6% target range, the SARB interest rate decision today boiled down to a trade off between the coming Eskom electricity tariff increase (and its uncertain second-round effects which could be higher than generally assumed) as compared to the weak economy.

With these two main risks to the inflation outlook mainly balancing each other out, the SARB kept interest rates unchanged, prime remaining at 10.5%.

Presumably it is now over to the government.

Be nice to Eskom (large electricity tariff increase granted) and the weak domestic economy will have to recover under its own steam as the SARB remains very much inflation focused, thank you.

See sense on Eskom, come up with a different funding model, impose a lower than expected electricity tariff increase, be pleasantly surprised by lesser second round inflation effects, and the risks to the inflation outlook might start (emphasize ‘might start’) to become less balanced and more favourable, assuming everything else remaining the same by the March Monetary Policy Meeting (which of course it hardly ever does, but still, it’s possible given the trends out there).

It therefore looks like government will make the really important decision, about electricity tariffs and by implication about the level of interest rates it should consequently get.

Don’t blame the SARB.

Cees Bruggemans is Chief Economist of First National Bank. Register for his free e-mail articles on www.fnb.co.za/economics