WHICH IS WORSE: IN­FLA­TION OR NO GROWTH?

Financial Mail - Investors Monthly - - Opening Bell -

wo mon­e­tary pol­icy com­mit­tee meet­ings will take place in July that could have sig­nif­i­cant im­pli­ca­tions for the rand, in­fla­tion and in­ter­est rates.

The first will be that of the South African Re­serve Bank (the Bank) from July 19-21, fol­lowed a week later by the Fed­eral Open Mar­ket Com­mit­tee (FOMC) in the US, from July 26-27.

In May, faced with the con­tin­u­ing dilemma of up­side risks to the in­fla­tion fore­cast com­bined with a wors­en­ing growth out­look, SA’s mon­e­tary pol­icy com­mit­tee (MPC) paused in its rate hik­ing cy­cle, hold­ing the repo rate at 7%.

De­spite some im­prove­ment in con­sumer in­fla­tion since Fe­bru­ary, the MPC con­sid­ers this respite tem­po­rary. It re­mains con­cerned about the in­fla­tion out­look.

In­fla­tion is ex­pected to peak at 7.3% in the fourth quar­ter of this year and re­main above the up­per limit of SA’s 3%-6% in­fla­tion tar­get un­til the third quar­ter of 2017. This is bad enough, but the bal­ance of risks is tilted to­wards an even worse out­come, the MPC fears.

Chief among these risks is the rand ex­change rate, which, the MPC says, “re­mains highly sen­si­tive to do­mes­tic po­lit­i­cal de­vel­op­ments and risks of an ear­lier-than-ex­pected tight­en­ing in US mon­e­tary pol­icy”.

At the same time, the MPC re­gards the do­mes­tic eco­nomic out­look as “weak”. An­nu­alised growth in the Bank’s lead­ing in­di­ca­tor of eco­nomic ac­tiv­ity has con­tracted for 29 con­sec­u­tive months, sug­gest­ing that growth could slow fur­ther.

At the May meet­ing the risks to growth were judged more wor­ri­some than those to in­fla­tion and the six com­mit­tee mem­bers voted five to one in favour of not hik­ing.

There are sev­eral com­pelling ar­gu­ments against the Bank hik­ing at the July meet­ing too, not least be­cause the MPC showed so lit­tle ap­petite for a May hike. The fact that only one com­mit­tee mem­ber was in favour of hik­ing at the last meet­ing sug­gests that the bar is set quite high against fur­ther rate hikes.

Since May, SA’s growth tra­jec­tory has con­tin­ued to worsen and the econ­omy now stands on the cusp of a re­ces­sion.

There is no cen­tral bank in the world that wants to hike in­ter­est rates into a re­ces­sion, least of all in SA, where more than 26% of the work­ing-age pop­u­la­tion is al­ready un­em­ployed and food in­fla­tion is ris­ing to­wards dou­ble dig­its.

Ac­cord­ing to Stats SA fig­ures pub­lished last month, SA’s GDP con­tracted at an an­nu­alised 1.2% in the first quar­ter, down from a pos­i­tive 0.4% in the fourth quar­ter of 2015.

In May, the Bank re­vised down its GDP out­look yet again from 0.8% to 0.6% for 2016, but this was on the as­sump­tion that first-quar­ter growth would be pos­i­tive, if only barely. The fact that growth has turned out to be de­cid­edly neg­a­tive sug­gests that the Bank will have to re­vise down its growth fore­cast again at the July meet­ing.

Many economists, too, ex­pect the first quar­ter to prove to be the low point for 2016 and for the econ­omy to re­cover slowly from here on out. Even so, sev­eral are re­vis­ing their growth fore­casts lower since the dis­as­trous first-quar­ter num­ber and be­lieve it is be­com­ing in­creas­ingly likely that the Bank will opt for only one more rate hike this year, if it hikes at all.

Sev­eral economists are re­vis­ing their growth fore­casts lower and be­lieve it is likely the Bank will opt for only one more rate hike this year, if it hikes at all

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