Rates Watch: Heads I win tails you lose

“Too close to call” that’s what experts are saying about the SARB’s upcoming (the afternoon of 17th March 2016) decision on rates. They believe that the odds for and against a rate hike are 50/50 and that after weighing up all the data you may as well flip a coin to predict what Governor Kganyago and his team will do.

The arguments for and against a rate increase are both very strong. But my gut tells me that we shouldn’t (and won’t) only be looking at the economic data when trying to figure out how the Monetary Policy Committee thinks.

Now, I’ll save you having to go through my rant below and say that I believe, on looking at the data and the news, that the SARB will keep rates on hold this month but they will be hawkish, at least in front of the cameras, about future increases. They have the breathing room thanks to 50 point increase in January and the improvements in the Rand across February and March (though currently the Rand is back on the ropes).

Now for that rant!

Our central bankers appear to be some of the more rational members of our bureaucracy. But the raw economic data alone is surely being adulterated by all the recent political developments. These guys aren’t locked in an asylum, fed only economic data and then wheeled out every two months to vote on the rate. They live in our country and some of what is happening must be seeping in. And the cynic in me screams “they’re probably also getting some interesting phone calls from higher ups!”.

The SARB has a mandate to keep inflation within a 3% to 6% band. The inflation rate is now firmly above that 6% threshold. The repo-rate is increasingly irrelevant in effecting change on the inflation rate. The 50 basis point increase to the rate in January is said to have had only exerted 10 basis points of downward pressure on the inflation rate. This is thanks to the drought, the rout in mining, global economic stagnation and the continued failures of our government. All factors that are not demand driven and as such the SARB, and the repo rate, can do nothing to change.

All that being said they haven’t, as yet, been given a new mandate by government and are likely to continue on their inflation targeting mission until ordered otherwise. The bank simply can’t go about doing its own thing, especially given the current political and economic volatility. We need to have some semblance of predictable behaviour somewhere.

But the fact remains that the South African economy is not growing fast enough to create employment. This in turn means that the consumer base and consumer spending are not growing. This feeds back into the economy and so on and so on. Increasing the interest rates will only serve to further erode the buying power of our heavily indebted consumer base as they are forced to use more of their money to pay off debt instead of buying goods and services (even basic ones!).

The current, seemingly daily, political debacles have also significantly eroded investor confidence both locally and internationally. Furthermore our labour relations are a mess. Our crime statistics are terrifying. Our society is seething with unrest. None of this is reassuring. And it is highly likely that things will degenerate further before getting better.

We can’t expect some swarm of angel investors to come in to spur on growth. We are not attractive, even to ourselves. There is no quick fix to this and it will take a concerted and coordinated effort from government to rectify the situation. The SARB will play an integral role in the coordinated effort but currently they are using a thimble to save a floundering ship.

And until the political will exists we will continue to see inflation targeting and repo-rate increases. We’re talking an additional 200 points (to 12.25%)by the end of 2018 (LETS NOT EVEN TALK ABOUT THE THREAT OF A DOWNGRADE!!!!). So, all consumers need to adjust their habits and reduce their exposure to debt. This is easier said than done as debt is being used by many ordinary people just to make ends meet.

I look hopefully to the current news of ANC MPs exposing alleged Gupta state capture and forward to the local elections when policies and leaders might (finally) be punished for their (many) failings. It is increasingly feeling like 2016 is a make or break year. Will it all work out in the end? Go find a coin…

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