To my mind

Finweek English Edition - - Letters - BY RIKUS DEL­PORT rikusd@fin­

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.

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