Reserve Bank steady as she goes on policy

N INTEREST-rate cut would at this stage not make any meaningful contribution to investment, economic growth and job creation.

The Reserve Bank’s monetary policy committee (MPC) this week left rates unchanged, as expected.

Although the risks of rising inflation were emphasised, Reserve Bank governor Gill Marcus said in the questionsand-answer session that the committee did not spend any time discussing a rate hike.

Instead, Marcus said the committee would “apply monetary policy consistent with its mandate of price stability withing a flexible inflation targeting framework ”.

This suggests that the MPC will tolerate a temporary breach of its inflation-target band’s 6% upper level.

The MPC statement highlighted concerns about growth, but Jannie Rossouw, professor at Unisa’s department of economics, said lowering interest rates would not have an effect on the economy, or solve South Africa’s labour problems.

Interest rates have been at a 40-year low since last July, with the repo rate at 5% and the prime interest rate at 8.5%.

“We cannot use lower interest rates now and think it will drive investment. It is not the cost of capital that inhibits investment, but perceptions about uncertainty and yield,” Rossouw said.

The chairman of the US Federal Reserve Bank, Ben Bernanke, said late last year that US interest rates would stay at exceptionally low levels as long as unemployment was more than 6.5%.

When asked about this, Marcus said if there were a magic formula saying that keeping interest rates at a certain level would address all of the impediments to increasing employment, then the answer would be very simple.

She pointed out that South Africa’s unemployment rate before the booming growth years which preceded the global financial crisis, was more or less the same as today.

Unemployment fell to around 23% in 2006 and 2007, but has since increased again to about 25%

“If you grow, you can address the question of unemployment to some degree, but that [23%] is indicative of a structural problem and you are not going to fix that structural problem with interest rates.

“South Africa’s real interest rate is already negative, so it’s not necessarily an interestrate problem.

‘‘ There are a multiplicity of issues that need to be addressed. We have to do things around education, skills and artisan training.”

Elize Kruger, economist at KADD Capital, said a 50 basis point rate cut would have not much short-term effect on the economy.

Rates have been moving in 50 basis point increments for most of the last decade, aside from four quick 100 basis point cuts in the first half of 2009.

Kruger said that prior to the global financial crisis, there used to be a clear reaction in the economy to a rate cut, in terms of household spending and fixed investment.

This correlation has, however, broken down.

There are other reasons why investment hasn’t flooded into South Africa, apart from simply the cost of capital.

In the case of fixed investment, for example, it can be linked to low business confidence, which in turn can be linked to political policy and how labour unrest is handled, Kruger said.

Ironically, the release of the business confidence index of Rand Merchant Bank and the Bureau for Economic Research has already been postponed twice because the post office strike in Gauteng has delayed the survey questionnaires.

The business confidence index of the South African Chamber of Commerce and Industry (Sacci), declined by one index point to 93 in February.

Sacci CEO Neren Rau said while business and consumers would have welcomed a rate cut, the Reserve Bank’s recent history would have favoured a 50 basis point cut at most.

Such a small rate cut would not have made a meaningful difference to swing business confidence out of its current doldrums, he said.

“If you had a 100 basis point cut, then that has strong motivational impact and you would have seen some response from business and consumers. With 150 basis point [it would be] even more so,” he said.

Although another rate cut would have put a few extra cents in the pockets of consumers, Kruger said that if all the monetary easing to date had not helped fix a business’s or a consumer’s balance sheet, then another 50 basis points less would not do so either.