CALLS for a cut in interest rates are getting louder, but the Reserve Bank should ignore them when its monetary policy committee meets next week.
On the face of it, there is a case to trim the Bank's key lending rate, which has been held steady at 5,5% - already a 30-year low - since November 2010.
Growth in the economy is set to slow sharply this year, falling short of the 2,9% rate the Bank predicted when the committee last met in May. Some analysts see growth slowing to as little as 2,3% this year, compared with 3,1% last year. The mining sector contracted sharply in the first quarter of this year and manufacturing is battling, although figures for both sectors released yesterday were surprisingly buoyant.
Last, but not least, a host of central banks around the world have recently cut rates or taken less conventional measures to ease monetary policy in a bid to counter the effects of a global slowdown, stemming mainly from Europe's sovereign debt crisis.
Local money markets have taken all of this into account and are pricing in a near certain domestic rate cut of half a percentage point before the end of this year, with the possibility of another thereafter.
Bond yields are at record lows because of the speculation.
But financial markets do have a tendency to get ahead of themselves - just a few months ago they were betting the Bank would start raising interest rates before the end of this year.
The main factor that would give the Bank leeway to cut interest rates this year is lower inflation.
The annual rise in the consumer price index subsided back inside its 3%-6% official target range in May for the first time in eight months, increasing by just 5,7%.
Up until now, most analysts had expected inflation to carry on declining for the rest of this year, led by lower food and fuel prices. Volatility in the rand was seen as the main threat to the benign inflation outlook.
But something has happened that may throw a spanner in the works. In the last month, global maize prices have climbed 40%, mainly because of a drought in the US, which is the world's biggest grain producer.
This is very bad news for South Africa, as local maize prices tend to take their cue from international trends as global demand filters into the domestic market.
Food prices account for about 14% of the overall basket of goods and services in the consumer price index, which is targeted by the Bank when it sets interest rates.
Food inflation has been declining steadily in the past six months, and this was the main reason overall inflation has been lower than most people expected.
With maize prices a significant component of domestic food inflation, higher prices for the food staple mean there is likely to be upward pressure on overall inflation in the months ahead. That is something the Bank will most certainly take into account when it announces its decision on interest rates next week.
The Bank's "flexible" inflation-targeting mandate means it must consider factors such as employment and growth during its monetary policy deliberations.
But there is little reason for action on this front either. Fallout from the European crisis is not yet so severe that it threatens to tip South Africa into recession, or to even curb growth to below 2% this year.
In a speech last week, Bank governor Gill Marcus said the decision to keep interest rates steady was as much of a choice as raising or cutting them and had created the "greatest certainty" for local markets. There is insufficient cause for the Bank to change this laudable stance now.