Unanimity about rate cut is reassuring
The Reserve Bank will hold a scheduled monetary policy meeting this week, and there’s almost unanimity among economists about what it will do.
In the context of the extraordinary time the country and the world are going through, this seems reassuringly normal. Which is also fitting as the country, after more than seven weeks enduring one of the strictest lockdowns in the world since the Covid-19 outbreak, clamours for normality.
The last time the monetary policy committee (MPC) met, the occasion was more akin to the era before such committees existed. In the inflation-targeting era, the communication of policy decisions has been largely a dull affair, which is good news if one goes by the principle that sound monetary policymaking should be boring.
That doesn’t mean events won’t interfere from time to time and that’s why the Bank has the flexibility to have unscheduled meetings “should the need arise”. The governor,
Lesetja Kganyago, who took over in 2014, has been especially boring, moving rates by more than 25 basis points only once before the one percentage point cut in March. That may be a testament to this is being his first proper financial crisis. It might well be the biggest crisis any central banker has ever had to deal with.
If the magnitude of the March cut, which took the repo rate to 5.25%, was a surprise, the move in April — cutting the rate by another full percentage point — was an even bigger shock. The Bank had up to that point shown an aversion to breaking away from its schedule.
Some will say they saw it coming due to the extension of the lockdown rendering the Bank’s prior assumptions about growth and inflation meaningless, a fact confirmed by a sharp revision in its GDP forecast to a 6.1% contraction.
What is beyond doubt is that the Bank will cut rates again on Thursday. Kganyago has indicated as much, saying he is not now worried about inflation and therefore has room to support the economy.
What has been the subject of debate is how aggressive the MPC will be. With an increasing number of economists saying the Bank is in danger of missing its inflation target — to the downside — it will not come as a big shock if it delivers another 100 basis point cut.
Rates at those levels, and heading only lower still, will reignite the debate about the usefulness of conventional policy in these unconventional times. With much of the economy still closed up and the ability of people to borrow and spend severely constrained, there’s already a degree of doubt about how stimulatory lower rates will be.
Could SA have already reached its so-called zero bound, where monetary policy loses its effectiveness, requiring the Bank to expand its role in the market and unleash a proper round of quantitative easing (QE)? In developed markets this was assumed to be the case when both rates and inflation were at, or close to, zero. And that’s when central banks undertook their huge QE policies, with varying degrees of success.
Of course the Bank could take the view that SA’s low inflation problem is nothing like what we saw in Europe a decade ago, or in Japan in the 1990s. It might judge that the dominant disinflationary forces are temporary in nature and driven mostly by the collapse in oil prices.
What has occurred in the euro area is a bit more structural. A decade of ultralow and negative rates, together with huge money printing, had little success in consistently getting inflation to the goal of the European Central Bank (ECB) of close to but below 2%. Inflation running at 0.4% makes it easier for the ECB’s president, Christine Lagarde, to justify printing money.
The ECB can argue that it is not doing so to lower member states’ borrowing costs but to achieve its legal mandate. In the UK, the Bank of England can point to projections showing inflation slowing to less than half its 2% target to justify its current policies and possible move to negative rates.
It’s doubtful that the Reserve Bank could make a similar argument in the absence of modelling suggesting a substantial and prolonged undershoot of its 3%-6% inflation mandate.
Unless it took the view, popular in the market, that the midpoint was now the de facto target and that it needs to act urgently to get inflation back there. It would be an interesting interpretation, and not one the government would want to argue against, and it would be consistent with its own rhetoric when the rate was edging towards 6%.
When the MPC concludes its meeting on Thursday, what will be interesting won’t be whether the repo rate is down by 50 or 100 basis points, but rather its new projections for growth and inflation, and the implication for policy.
With the government’s haphazard approach to easing the lockdown, the impact on the economy can only be negative, and economists will be on the lookout for how much gloomier the Bank is on GDP.
It has already said that the risks to the inflation outlook are to the downside.
With the farce around a degree of the lockdown regulations so far, the state doesn’t have the capacity to “guide” the economy in an efficient manner with a proper understanding of the complexities involved. It’s not clear, for example, how companies that source components and employees throughout the country will operate in situations where the government allows some provinces to open up faster than others, affecting a range of decisions to do with production.
But in these trying times it’s good to have a degree of certainty. The Bank will cut rates, though that won’t be enough. And the “QE or not to QE” debate will start afresh.