To my mind
OVER THE COMING weeks there will be much speculation about what the SA Reserve Bank should or shouldn’t do with interest rates when its Monetary Policy Committee meets this month.
The first salvoes have already been fired, with the announcement of the inflation and PPI figures for December. Almost immediately after that, sentiment swung from a definitely expected increase to views increasingly suggesting that an increase may not be a foregone conclusion. By next week, the mood could have turned again, depending on what SA’s credit extension figures show.
Some now believe that we saw the last of the interest rate hikes in December, but others are more pessimistic and believe that there will probably be another one this month, after which the rate will be left unchanged for some time.
We at Finweek also don’t know what’s going to happen. Though it looks very likely that the Bank will again increase interest rates, we feel that’s not what our economy needs now. There are a few reasons for that. One of the most important is probably the latest inflation figure, which shows that consumer inflation – the CPIX, which excludes home mortgages – hasn’t risen since the previous month’s 5%.
An important point is that food inflation – the main contributor to the rates increase over the past year – looks less ominous. In December it stood at 7,7%, slightly lower than November’s figure, when it reached an annualised rate of 8,9%. Some economists feel that it’s already reached its upper turning point.
Another reason is that the oil price has started falling. It has already dropped by 12% since the previous MPC meeting. That decrease will mean that the petrol price could probably fall by as much as 24c/litre this month, which would ease the pressures on inflation.
The stabilising of the rand should also allow inflation expectations to cool – a third reason why interest rates shouldn’t be increased. Though the rand is currently trading at US$1/R7,11 – slightly weaker than at the time of the previous MPC meeting – this weakening is significantly less than the fall in the oil price. In addition, the producer price index rose by only 9,3% on an annualised basis in December, after climbing by 10% in November. Admittedly, that’s higher than the levels of 5,1% a year ago – but the pressure on inflation is clearly easing.
On the basis of these factors it seems unlikely that the CPIX will break through the Bank’s upper target of 6%. Besides, interest rates have been adjusted on four occasions – each time by half a percentage point – and the current prime overdraft rate already stands at 12,5%.
Economists says there’s a delay of between six and nine months, which means that the effect of those increases will only now start being felt by consumers. Then consumer spending should decrease further – another reason why interest rates should not be increased.
Nevertheless, consumer spending shouldn’t play such a major role in the Bank’s decisions in its efforts to keep inflation under control. Under the leadership of Governor Tito Mboweni, the Bank is supposed to target inflation and not consumer spending, or even the trade deficit. Though those are important factors, oil and capital goods – not consumer goods as such – make an important contribution to SA’s import account. So why penalise consumers?
Some of the international academics who act as advisers to President Mbeki recently said that inflation in SA is targeted too “narrowly and rigidly”. They reckon the Bank should pay more attention to economic growth by allowing the rand to weaken without overreacting by hiking interest rates (see report, page 47).
Given all those factors, it looks as if credit extension figures that indicate that consumer spending is still increasing aren’t sufficient reason for Mboweni to increase the interest rate further. SA is a growing economy that can afford consumers who spend a little – provided it doesn’t get out of hand. However, there are ample indications that the pressure has eased for the time being. That’s why it’s important for the MPC to think twice before it decides to adjust the rates upward.