The case for stable rates
In exactly a week the Reserve Bank will be concluding another policy meeting. On the face of it, this one should be a simpler affair than the September meeting, when policymakers were split by one vote in favour of staying put.
The good news is that a rate increase, which seemed more likely than not months ago, can be more or less be ruled out.
While the external environment hasn’t suddenly become rosy, it does have a more serene feel to it. For one thing, currency collapses and emergency rate hikes from Turkey to Argentina are no longer dominating the conversation.
There is reason to be concerned about headlines coming out of Europe and the potential for some market discomfort. Italy, the euro area’s biggest debtor nation, is at odds with the European Commission over its budget, with a risk that the populists in charge in Rome won’t back away from their war of words with Brussels, a vote-winning strategy, even if economically costly. While nobody is expecting another full-blown sovereign debt crisis, the stand-off isn’t going unnoticed by investors. Italy’s main stock index was down almost 2% on Wednesday morning, while 10-year bond yields were at their highest since November. Negative market sentiment that weakens the euro, already trading near its June 2017 lows against the dollar, will be felt here.
Investors will also be looking closely at the UK, where the government is trying to finalise a divorce agreement with the EU. The risk here is not so much about an argument between the UK and the EU, but the possibility of Britain’s government failing to garner support at home, potentially leading to its collapse at a chaotic Brexit, the consequences of which are hard to predict. The UK is not as important to the global economy as it used to be, and some analysts have argued a chaotic Brexit would not be as harmful as the collapse of Lehman Brothers, which caused a worldwide recession.
It would, however, be better if we didn’t get a chance to find out, and the pound’s gains this week imply that investors are gaining in confidence that sanity will prevail.
Even talk of a potential USChina trade war has eased somewhat, while the emergence of a split Congress after the US midterm elections makes the implementation of dollar-friendly policies less likely.
All this would imply that the fate of the rand, which has barely moved since the last monetary policy committee (MPC) meeting, won’t be dominating policymakers’ discussions this time round.
On the domestic front, economic data has done nothing to threaten the Reserve Bank’s view that demand pressures in the economy are unlikely to be a source of significant inflation risk. Since the last MPC meeting, we’ve had a new finance minister, Tito Mboweni, whose first task in government was to present a medium-term budget policy framework that was notable for slashing the Treasury’s 2018 growth forecast, which is now in line with the Bank’s at just 0.7%.
Based on other reports since then, the best that can be said is that the economy probably avoided a third quarterly contraction in the three months to September. Wednesday’s data showing growth in retail sales in September was the slowest in a yearand-a-half, coming in shortly after another plunge in mining production, confirmed the recovery from the recession will be slow.
So what arguments could the Bank have for raising interest rates? A month or two ago, we would have had to look at the rand and oil prices, and the fact that inflation was on an upward trend, moving it far from the middle point of the Bank’s 3%- 6% range.
On that score, it’s safe to say that oil prices have been a game changer, with Brent crude down about 17% since the last MPC meeting. This, together with the relatively stable rand, should translate to a hefty drop in the petrol price in December, which should ease policymakers’ concern about runaway inflation.
It’s been a tough and volatile year for SA. At least it’s looking as if we won’t be getting a rate hike for Christmas.
THE ECONOMY PROBABLY AVOIDED A THIRD QUARTERLY CONTRACTION