NO COMIC RELIEF
Finance Minister Malusi Gigaba dished out some bitter medicine in his budget speech in parliament in Cape Town.
Next month, the Reserve Bank should use the little space it has to cut interest rates — given that the world’s leading central bankers are clearly charting a course to higher lending rates over the next couple of years as they countenance the return of the dreaded inflationary dragon. Economic theory dictates that tightening monetary policy in the developed world means that their currencies will strengthen and emerging-market currencies such as the rand will weaken. Given our import bill, a weak rand means higher inflation, meaning the central bank will have no option but to follow the Western world and raise our borrowing costs.
But as the situation stands, the US Federal Reserve, the Bank of England and the European Central Bank are still talking about just when the great wave of normalisation of monetary policy will move into full swing. In this window, we’ve had a currency strengthen to levels last seen in February 2015, about 10 months before President Jacob Zuma’s mad crusade to capture the Treasury by firing finance minister Nhlanhla Nene. The latest data points to inflation sitting at 4.4%, the middle of the target band of 3%-6%.
There’s really no better time than next month for the central bank to cut rates, perhaps even by a full 50 basis points. I’m not too sure those
25-basis-point cuts have much impact.
For the longest time, monetary policy has been a retired tool in the governor’s box of tricks, as the era of bad politics — which we are all hoping is over — and the mismanagement of fiscal policy became much too much of a weight on the country’s growth prospects. The mismanagement, especially of state-owned enterprises, weakened the rand, and business and consumer confidence, in what for the most part was a climate of rising inflationary pressures. They all served to tie the
Reserve Bank’s hands.
They are untied, for now anyway, as the country finds itself in a very different environment. Food and fuel prices are tumbling, and there’s an impressive maize crop expected, factors the central bank should take advantage of, says Ian Cruickshanks, an economist at the Institute of Race Relations.
To sustain the positive sentiment around SA Inc, it’s a rate cut that is lined up for the “conservative” central bank. Since Lesetja Kganyago became its governor in November 2014, he has only been in a position to cut rates once, and that was by 25 basis points in July last year. He has not been a bearer of good news for the economy as he has had to hike rates five times to the tune of 200 basis points. While tightening policy, he has had to use his podium to lecture his government about its excesses.
For the consumer, it’s a tenure that has brought no fun really, never mind the increased credibility the institution has managed to garner over the past few years. South African retailers largely remain under pressure from the shrinking wallets of their customers. Some, such as Woolworths, have resorted to rather interesting global adventures to find growth, but the returns aren’t promising.
So, Mr Governor, the stage is yours to provide some relief for a country that’s had to stomach what was a difficult budget this week. No matter who delivered it, the story would have been the same. A story of tax hikes and a promise of expenditure cuts.
Hope was an important message and, in fairness, Malusi Gigaba tried to sprinkle some fairy dust on what was always going to be a bitter pill to swallow. Truth is that fiscally, there’s simply no space for the government to breathe hope into the economy; what’s of importance is regaining credibility in the eyes of bondholders.
Now just imagine for a second if the other faction in the ANC had won that December elective conference. I’d be writing about a hard budget and falling currency, both of which would have drowned this economy. We have a different story to tell — let’s take advantage.
For the longest time monetary policy has been a retired tool