The South African Reserve Bank has adopted an inflationary targeting strategy. This means that the policies they examine and adopt all focus on keeping inflation within a target range of 3% to 6%. Which basically means tweaking interest rates to nudge inflation up and down.
The SARB has stubbornly stuck to this strategy and this consistency and high degree of predictability is exactly what we need. But the many problems facing the economy are simply beyond the control of the SARB and its Monetary Policy Committee as they require internal structural changes in government, labour, trade and business in order to shield South Africa from external global turmoil. Don’t hold your breath on those changes: it will take time as well as a political will and vision that doesn’t seem to exist at the moment.
Now to today’s decision: what will the SARB do with rates?
Well, June’s inflation quickened to 6.3% from 6.1% in May and so the inflation rate has remained above the target of 6% for first half of 2016 despite a total increase to the lending rate of 75 basis points. On the surface, with the SARB strategy in mind, this would indicate that the increase to the rate is highly likely. But, as always, several factors are in play that might give the SARB pause, the key factors being:
1) Significant Rand strength against Dollar and Pound
There are a few reasons for this but the results, generally speaking, are cheaper imports. Which means lower input costs for manufacturing, sales and some relief for the South African consumer.
2) Slight decrease of the oil price
The strength in the Rand also comes at a time of a period of sustained downward pressure on the oil price which has traded at below $50 for most of July. Locally there is talk of a large decrease in the price of petrol in August which will in turn place downward pressure on inflation.
3) 75 basis points increase for the year
It is only July and the interest rate increased from 6.25% in January to 7%. this has increased the cost of lending significantly over a relatively short amount of time and the effects of these increases have yet to filter through to the consumer and the wider economy.
4) There are still two more MPC meetings
With two more meetings (and potential changes to the interest rate) scheduled for this year (one in September an one in November). The SARB has time to adopt a “wait and see” approach to inflation, interest rates and the economy.
The first two factors speaking against a rate increase can disappear overnight but for now they give the SARB some breathing room and a reasonable expectation, in light of the previous rate increases (our third factor), that inflation can still be reined in at the current level.
With this breathing room and the fact that there are still scheduled meetings to come I believe the SARB will keep the rates on hold today. If inflation stays above 6% in the third quarter, however, it makes another increase this year almost certain.