Name: Nicky Weimar
Organisation: Nedbank
Title: Senior economist

1) With inflation running at 10.9%, questions have been raised as to whether South Africa should relax its strict adherence to the policy. Do you agree?

We believe that inflation targeting remains a useful framework and anchor for monetary policy.  Although these are extraordinary circumstances, with the inflationary pressure mainly coming from global oil and food prices, the explanation clause theoretically already provides for such shocks. The SARB has however opted not to adopt this clause, and perhaps this should be the grounds for debate, not whether inflation targeting should be dropped or not. In our opinion interest rates needed to go up, with or without an inflation targeting system.
We do however feel that the SARB has done its job, consumers are responding overwhelmingly to the tighter interest rate stance; spending and borrowing are coming down to lower levels, and in some cases alarmingly sharply.

2) Interest rates are currently at 12% with more hikes expected. When do you think they will peak, and do you agree they should rise further?

We believe that we are near the peak.  We expect another 50 bpts in August.  Although the risk of another 50 bpts in October remains uncomfortably high, we have not calculated this into our forecast. After August we expect interest rates to remain unchanged at the higher level until the second half of next year.  The SARB is not likely to cut rates before there is compelling evidence of a downturn in the inflation cycle, and this is only likely to be evident in 2009.

3) Oil prices are continually hitting new record highs. Why is oil so expensive now and will prices come back down in the short to medium term?

Oil prices have been rising since 2004. The surge in global oil prices has mainly be driven by exceptionally strong demand from the fast growing Asian emerging markets, especially China and India.  Added to this, development of new oil production capacity has been slow to increase. As a result, the balance between demand and supply has been very tight, driving up prices. Adding to the problem has been the conflict in the Middle East, Iraq and the dispute between the US and Iran, and political instability in many non-OPEC oil producing countries. Fears of disruptions to supply in an already tight market have therefore also pushed up prices. A collapsing US dollar has been another key driver, and increasingly speculators are being blamed for pushing prices higher even as oil demand in the OECD countries is moderating.

4) Much of the economic trouble we are seeing was sparked by the credit crunch in global financial markets. Do you foresee this easing in the short term?

The credit crunch has certainly been a major contributor to the woes in the US economy, and complicated economic circumstances in Europe and Japan.  However, it has not been the main reason for high commodity prices and rising inflation. The world economy as a whole is now dealing with the consequences of a decade of strong growth, excessive spending and borrowing due to excess liquidity and exceedingly stimulatory monetary policies.  In essence, we are now experiencing the 'indigestion and heartburn' that often follows a 'rich and excessive meal'

5) What is your view of the South African economy over the next 12 to 18 months?

We see the economy weakening.  Consumers are already taking strain under the combined impact of rising prices of necessities, high interest rates and relatively high debt burdens.  Consumer spending is therefore expected to ease sharply in months ahead, and there is a strong possibility of a consumer recession. The overall economy's performance will fortunately be buoyed and supported by continued robust growth in infrastructure spending. Overall we will see much slower growth (down to around 2.5% from 5% last year), but we should manage to avoid an overall recession.

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