Ron Derby column
Towards the end of last year the script for global monetary policy was cast in stone. The US had ended a six-year experiment in quantitative easing and this year was supposed to see the first rate rise in that country in almost a decade. The UK was expected to follow suit as that economy continued its gradual improvement.
In response to a tightening environment, the South African Reserve Bank and other emerging market central lenders were expected to follow.
That was until oil prices cooled quite significantly — they are down 50% since the end of June — reducing inflationary pressures across emerging market economies, which have been slowing over the past two years.
With SA’s growth far below its potential because of its many constraints, chief among them the availability of electricity, the lower oil price has come as welcome relief for Monetary Policy Committee members, who up until a few months ago were likely to increase interest rates.
Some economists are now forecasting an inflation average for the year as low as 3,5%. If oil remains at current levels, there will be reduced pressure on governor Lesetja Kganyago and his team to consider a hike in the first half of the year. (In the unlikely event that the rand stages a recovery in the weeks before the MPC meeting next month, the governor may very well field questions about the possibility of reducing rates.)
The UK central bank governor, Mark Carney, has also changed his tune on higher rates in that country as inflation remains on the low side. Without that push, there’s simply no point in raising rates in a country that owes a large chunk of its recovery to its property market. Since Carney took over from Mervyn King, this will be the second time that his message — or his tone, rather — has had to change.
Across the channel, the European Central Bank has had to begin its own round of QE to boost not only growth but inflation. The region is close to deflation. That should be its main concern, but the renewed tensions around Greece and whether it will leave the union must have the central bank sweating about the impact on the currency.
The only country looking to keep to its 2014 promises is the US Federal Reserve, whose members continue talking up a rate rise by the middle of the year. An increase would only strengthen the dollar as investors looked for higher-yielding assets.
I am not sure a strong dollar is all too positive for the US, no matter how politically strong it makes a president. The stronger it becomes against its trading partners, such as the euro, the less competitive its exports. Though exports make up only 13% of the US gross domestic product, they have been a buoyant part of its economy. Since reaching an all-time record in October last year, exports have been decreasing because of the greenback’s strength.
So, with all its trading partners looking to either leave rates unchanged or lower them to boost their still ailing economies (or in the case of the UK to boost inflation), one wonders whether messages out of Washington will change as the year drags on.
Monetary policy in 2015 is as unclear as it has been since November 2008, when the Federal Reserve adopted its unconventional monetary policy. It is still a very uncertain world.
Should oil not stage a stronger rebound than it already has over the past month and should the rand hold steady (as it is unlikely to strengthen in the near future, given concerns around power capacity), then the Reserve Bank should keep rates on hold.
There are many scenarios to play with, which tells me the central bankers’ role in inspiring growth in the global economy is now surely at its end. They have more than enough problems on their hands. The structural weakness of economies such as ours need to be dealt with by government, the private sector and unions.
Monetary policy has papered over the cracks for as long as it possibly could. The tools are a spent force.
Renewed tensions around Greece and whether it will leave the union must have the central bank sweating