Time to call a halt to aggressive cuts
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