Mboweni’s dilemma

Time to call a halt to ag­gres­sive cuts

Finweek English Edition - - Economic Trends & Analysis - GRETA STEYN gre­tas@fin­week.co.za

JUST A JUMP TO THE LEFT for Re­serve Bank Gov­er­nor Tito Mboweni. That was the gist of the head­line on a re­port in The Ci­ti­zen at end-May af­ter the Bank’s last Mon­e­tary Pol­icy Com­mit­tee (MPC) meet­ing. It il­lus­trates the dilemma Mboweni faces.

The dilemma is that Mboweni is at the mon­e­tary pol­icy reins at a time when there’s near panic about the econ­omy, so that con­cerns about inflation seem a lux­ury. But he’s a cen­tral banker and there­fore con­cerns about inflation can never be a lux­ury.

Mboweni has al­ready cut in­ter­est rates ag­gres­sively – by 450 ba­sis points since De­cem­ber 2008 – bring­ing SA’s prime over­draft rate to 11%. The ques­tion now is: How much fur­ther?

Mboweni sig­nalled at the me­dia con­fer­ence af­ter the last MPC meet­ing there was lit­tle ap­petite in the com­mit­tee for fur­ther ag­gres­sive in­ter­est rate cuts. He didn’t rule out any cuts: the mes­sage was rather they would be smaller (50 ba­sis points rather than 100 ba­sis points) and with fewer to come.

Is Mboweni right in sig­nalling cau­tion? The sad truth is that it’s very easy to make a case for fur­ther ag­gres­sive eas­ing. As the MPC it­self noted, the rel­a­tively strong rand should cush­ion some of the blow from the rise in the oil price. Pro­ducer inflation is be­low 3% and that may be ex­pected to flow through to con­sumers. Per­haps most im­por­tantly, banks have tight­ened their credit cri­te­ria and a one per­cent­age point cut in the repo rate no longer trans­lates into the same re­lief for bor­row­ers. Banks charge cus­tomers a mar­gin above the prime over­draft rate and some have in­creased that mar­gin so that the sharp fall in the prime over­draft rate from its peak of 15,5% is de­cep­tive.

You can see the ef­fects of the banks’ credit tight­en­ing in the credit fig­ures. Stan­lib econ­o­mist Kevin Lings says the small rise in the an­nual rate of growth in pri­vate sec­tor credit ex­ten­sion in April from March is de­cep­tive: ex­clud­ing the in­vest­ments cat­e­gory, pri­vate sec­tor credit grew by only 0,1% month-on-month or only R1,77bn. “Which is ex­tremely low growth,” Lings says.

The an­nual rate of in­crease in pri­vate sec­tor credit ex­ten­sion was around 8,7% – a sharp plunge from lev­els of about 27% pre­vail­ing in mid-2007.

It’s clear SA’s con­sumer credit binge is over. De­mand pres­sures, as the MPC it­self noted in its state­ment, “re­main sub­dued”. Real re­tail sales recorded a 5,3% year-onyear de­cline in March, the MPC notes, and a 1,9% fall month-on-month.

The most com­pelling ar­gu­ment in favour of fur­ther in­ter­est rate cuts is the fact SA is in a tech­ni­cal re­ces­sion. Trea­sury di­rec­tor­gen­eral Le­setja Kganyago says SA would do well to get 0% growth for the year; other economists be­lieve neg­a­tive growth of 1,5% is more likely.

How­ever, while all that sug­gests Mboweni should wield his knife again, and then again, the sad truth is that inflation is re­fus­ing to play ball. Con­sumer inflation has eased to 8,4% in April from its peak of 13,6% in Au­gust 2008. Though that’s a sharp fall, it hasn’t pro­ceeded at the speed the Bank – and pri­vate sec­tor economists – had ex­pected.

Stan­dard Bank econ­o­mist Danelee van Dyk now only ex­pects inflation to go be­low 6% in March next year. ETM econ­o­mist Ge­orge Gly­nos is looking at sec­ond quar­ter 2010.

How­ever, it’s im­por­tant to note the Bank’s time hori­zon for its mon­e­tary pol­icy de­ci­sions isn’t the near term. It’s looking ahead to 2010 and inflation dip­ping be­low 6% dur­ing the year. But it’s wor­ry­ing to note SA’s cen­tral bank no longer pro­vides a spe­cific inflation fore­cast in its MPC state­ment. From the Mon­e­tary Pol­icy Re­view charts, Ned­bank economists have in­ferred the Re­serve Bank ex­pects inflation to drop to 6,4% in third quar­ter 2009 and 6,2% in the fourth quar­ter be­fore reach­ing 5,4% in the fi­nal quar­ter of 2010.

Against that back­drop, if the Bank re­mains very ag­gres­sive it would again cre­ate the con­di­tions for a credit bub­ble and a bust in the rand, as seen in Oc­to­ber last year. Stok­ing do­mes­tic de­mand too much will put pres­sure on SA’s bal­ance of pay­ments through im­ports, cre­at­ing the threat of a run on the rand. All that seems very far off, but mon­e­tary pol­icy works with a lag and the ac­tions taken this year could have dire con­se­quences later.

Mboweni is right to be less ag­gres­sive from now on. But how much fur­ther will he go? Rand Mer­chant Bank econ­o­mist Et­ti­enne le Roux ex­pects a fi­nal 50 ba­sis point re­duc­tion, per­haps not in June but in third quar­ter 2009. Ned­bank ex­pects a fur­ther 100 ba­sis points. Ei­ther way, it’s clear – and right – that the in­ter­est rate cut­ting cy­cle is near its end.

Credit growth “ex­tremely low”. Kevin Lings

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