Busy time for central bank watchers

Is the central bank asleep at the wheel? That was a question from a big newspaper after last week’s interest-rate decision. And the reference was not to the SA Reserve Bank, which has kept the repo rate unchanged at 3.5%, as forecast by economists.

During the global financial crisis over a decade ago the Bank of England came in for criticism for tolerating inflation that was more than double its target. The European Central Bank also got stick, for the opposite. For a decade, it never looked as if it was going to get the eurozone rate up to its then target of “below but close to 2%”.

Analysts queried last week if UK policymakers were being complacent by voting to persist with a bond-buying programme, despite saying inflation will accelerate to more than twice its target. It tried to strike a balance between concern about inflation, which it admits might not be as “transitory” as it initially believed, and signs that economic growth, was tapering off.

While trends in prices have heightened the case for a “modest tightening” of policies set for a crisis that has largely passed, this was not imminent.

In a busy week for central bank watchers, one would also have seen the similar message from the US Federal Reserve. It also held its main interest rate near zero, and also stated that hikes could come sooner than markets expect.

The Fed, which has been buying $120bn of assets each month, said “a moderation in the pace of asset purchases may soon be warranted”, with a disclaimer that this is dependent on whether “progress continues broadly as expected”.

The mystery is the actual time frame of “soon”. Perhaps with a view to previous episodes of market tantrum it does not want to spook investors who have been used to a steady diet of low interest rates and liquidity injection from quantitative easing programmes.

Its higher inflation outlook, as in the UK, needs to be balanced with expectations that growth will slow, leading markets to expect that hikes, if they come, will only start in 2022 and be gradual.

It was much a similar message from SA Reserve Bank governor Lesetja Kganyago at the end of the monetary policy committee’s meeting on Thursday.

There is growing concern about the inflation outlook, with risks assessed to be to the upside, but the Bank also expects growth to revert to type in outer years. It downgraded its 2022 and 2023 forecasts for GDP growth to 1.7% and 1.8%, levels that were inadequate even before the economy was hit by the Covid-19 shock.

As Business Day has argued, the outlook for inflation and the Bank’s own credibility meant it was a good decision to stay put, given that the economy still needs support. Conditions could change. The current account surplus may not remain supportive of the currency as it has so far, and it might come under more pressure if developed countries do start tightening policy — rising yields from the UK to Germany indicate increasing expectations that developed market economies will start to reduce stimulus — hitting demand for higher-yielding but riskier currencies.

There was another central bank that held its policy meeting last week. Though SA’s outcome was more in line with what was seen in developed countries, Turkey shocked investors. Its inflation is running at over 19% and the consensus was that bank governor Sahap Kavcioglu would keep rates unchanged. Instead he slashed them by a full percentage point. Since Kavcioglu was appointed in March, with President Recep Tayyip Erdogan having fired his predecessor for hiking rates, the lira has tumbled 15%.

In contrast, the rand has been stable and is the best performing, big emerging market currency of the past year.

An unstable currency and sharply rising prices hurt the most vulnerable in society, despite the persistent belief that there is a trade-off between growth and containing inflation.

On rates, SA is fortunate to be mentioned in the same breath as Norway, which hiked rates by 25 basis points, rather than a perennially unstable market such as Turkey.

The question is whether it will be caught napping when the tide turns.

SA IS FORTUNATE TO BE MENTIONED IN THE SAME BREATH AS NORWAY … THE QUESTION IS WHETHER THE BANK WILL BE CAUGHT NAPPING WHEN THE TIDE TURNS