Con­fu­sion about rates

Time for Mboweni to talk

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN

IT’S OF­TEN SAID A WEEK is a long time in pol­i­tics. It’s even longer in the midst of a global eco­nomic cri­sis, when cur­rency move­ments are enough to make you dizzy. That’s been the case with the rand, which has gone from threat­en­ing US$1/R12 to be­low US$1/ R11 at the time of writ­ing. Un­sur­pris­ingly, the cur­rency’s gy­ra­tions have caused ma­jor con­fu­sion about the fu­ture course of in­ter­est rates.

First, the emer­gency in­ter­est rate cut by six of the world’s ma­jor cen­tral banks ear­lier this month, com­bined with a sharp fall in the oil price, led to spec­u­la­tion that in­ter­est rates may be cut early. Then the rand went into free fall and the spec­u­la­tion did a sharp about­turn – fears arose of an in­ter­est rate hike.

Ef­fi­cient Group economists Fanie Jou­bert and Doret Els say when the rand was still above R11 to the US dol­lar that, if the cur­rency per­sisted at those lev­els, the SA Re­serve Bank would be forced to hike rates at its De­cem­ber Mon­e­tary Pol­icy Com­mit­tee meet­ing.

Some economists, such as Econometrix’s Azar Jam­mine, weren’t as pes­simistic as to fore­cast an in­ter­est rate hike, but said there was a dis­tinct pos­si­bil­ity in­ter­est rate cuts would be de­layed. Oth­ers stuck to their guns, say­ing that an in­ter­est rate cut in April was still on the cards.

Amidst all this noise and con­fu­sion the si­lence from the SA Re­serve Bank has been deaf­en­ing. What we have heard from Bank Gov­er­nor Tito Mboweni is a spir­ited de­fence of inflation tar­get­ing. He got all re­li­gious over the is­sue, say­ing we should “pray for” peo­ple who op­posed SA’s mon­e­tary pol­icy frame­work. In ad­di­tion, he made a com­ment that SA’s cen­tral bank should show flex­i­bil­ity in the face of a cri­sis in the fi­nan­cial mar­kets.

That’s not been enough to clear up the con­fu­sion. The time has come for Mboweni to start in­form­ing the mar­kets of his think­ing. True, cen­tral bankers can’t be too clear about what they think, be­cause their job is a mov­ing tar­get and they can’t af­ford to be nailed down to one po­si­tion. But Mboweni needs to let the mar­ket know – sub­tly, of course – if ex­pec­ta­tions of an in­ter­est rate cut in April are re­al­is­tic.

The rand has weak­ened way be­yond the US$1/R8,50 level the most pes­simistic economists had ex­pected for year-end 2008. While it’s strength­ened con­sid­er­ably from its weak­est lev­els, the pic­ture has changed dra­mat­i­cally.

The gov­er­nor’s si­lence when the panic was on wasn’t a good sign: it sug­gested an in­ter­est rate hike might well be on his mind. But Rand Mer­chant Bank econ­o­mist Et­ti­enne le Roux says de­spite spec­u­la­tion of an im­mi­nent rate hike to sup­port the rand, there are good rea­sons why that won’t hap­pen.

Le Roux says the Bank is most likely to treat the cur­rent pe­riod of rand weak­ness in the same way it would any sup­ply-side shock – that is, ac­com­mo­date the ini­tial in­crease in rel­a­tive prices and act only if and when those feed into a gen­eral de­te­ri­o­ra­tion in inflation prospects. “For that to hap­pen – and bear­ing in mind SA’s weak­en­ing do­mes­tic econ­omy as well as the re­cent slump in US dol­lar food and oil prices – it will prob­a­bly take a sus­tained fur­ther fall in the value of the rand. Be­sides, given ex­treme volatil­ity, an­other sell­off isn’t guar­an­teed, es­pe­cially if the rand is al­ready over­sold,” Le Roux says.

He adds that SA’s bank­ing sys­tem, though in good shape, isn’t all plain sail­ing. House­hold debt lev­els have in­creased sharply. That, com­bined with higher in­ter­est rates, has al­ready re­sulted in a strong in­crease in banks’ bad debts. “We doubt if the Re­serve Bank would want to raise rates fur­ther and so risk a po­ten­tial dis­or­derly in­crease in non­per­form­ing loans. That would put ad­di­tional (and un­nec­es­sary) pres­sure on SA’s bank­ing sec­tor at the most in­ap­pro­pri­ate time.”

In­vest­ment So­lu­tions econ­o­mist Chris Hart says if the rand weak­ened to close to

De­spite spec­u­la­tion of an

im­mi­nent rate hike to sup­port the rand, there are good rea­sons why that

won’t hap­pen.

US$1/R12 and re­mained at that level, the Bank would hike in­ter­est rates – based on inflation fun­da­men­tals. How­ever, he be­lieves it would be the wrong thing to do. He says house prices would de­cline and house­holds would be un­der ex­treme pres­sure. That would put pres­sure on the bank­ing sys­tem and could lead to the desta­bil­i­sa­tion of SA’s banks.

Stan­dard Bank econ­o­mist Danelee van Dyk says the bank is stick­ing to its fore­cast of a cut in in­ter­est rates in April, de­spite the sharp de­pre­ci­a­tion in the rand. She says com­modi­ties prices have fallen sharply, which would help inflation. Van Dyk ex­pects the rand’s weak­ness to add at most 0,2 to 0,4 per­cent­age points to inflation next year, which isn’t ma­jor. She also be­lieves the rand will strengthen from cur­rent over­sold lev­els to US$1/R9 by year-end.

Hasn’t shown his hand. Tito Mboweni

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