Confusion about rates
Time for Mboweni to talk
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
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