Did the monetary policy committee drop the ball?
THE “SURPRISE” increase in the repo rate from 6.5 to 6.75 percent by the monetary policy committee on Thursday, although expected by some economist, lifted eyebrows not only domestically, but also globally.
In reaction, share prices on the JSE experienced an even bigger sell-off of stocks than was anticipated.
Although risky assets like shares were sold last week on most bourses around the globe, South African stock took quite a hiding. Even the rand could not keep up its stronger levels of last Thursday, after the repo rate announcement. The local currency had traded against the dollar on R13.86 at the close on Friday. This was 13 cents weaker than the close the previous day.
One may question the timing, as well as the wisdom of the Monetary Policy Committee (MPC) policy of rather “now than later”.
It is now clear that the MPC uses an “unofficial” new inflation target of 4.5 percent, or the so-called mid-point level.
Although the SA Reserve Bank forecasts that the average inflation rate will be 5.5 percent next year and 5.3 percent in 2020, that is well below the upper “official” target of 6 percent. The MPC still insists that another 0.75 percent increase, or three 0.25 percent lifts are necessary to bring down the rate to a more “safe” 4.5 percent.
The main reasons for the hawkish approach of the MPC also are debatable. The argument of the expected higher oil price and current weaker rand exchange rate seems to be a bit outdated.
The international oil price dipped below the $60 (R829) level on Friday, while the rand exchange rate is now almost 100 cents stronger at R13.88 to the dollar than the previous meeting. These “risks” have already subsided.
The fear by the MPC of global financial risks, namely higher US interest rates, more intensive trade tariffs between the US and China and a Brexit failure also seem to be outdated. It is felt by many economists that these risks also are about to subside.
The other two risks pointed out by the MPC, namely high wage demands by labour unions and expected sharp increases in electricity and water prices, are worrying, but both are of supply side or of a cost nature that will not be cured by raising interest rates. The downside of this unfortunate increase is rather its worrying effects on economic growth and unemployment over the next two years.
On the JSE, share indices are now surely in a bear phase. The all share index traded 1 398 points, or -2.7 percent, lower than the previous week and is now 14.8 percent lower since the beginning of the year.
The resources 10 index lost 5.8 percent, while industrials were down by -1.5 percent. Financials traded down by 2.8 percent and the listed property index decreased by 1.4 percent.
This week investors and consumers will await the announcement of the latest economic growth rate data for countries like the US, Germany, France, Brazil, Italy and India.
On the domestic front, the latest trade balance, consumer and business confidence indices, money supply and credit figures will be released.
Chris Harmse is the chief economist at Rebalance Fund Managers.