The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL
The Reserve Bank in Pretoria. Picture: FINANCIAL MAIL

The Reserve Bank has taken flak for split votes at the most recent meeting of its monetary policy committee (MPC), with concern being voiced that this sends out "confusing signals".

In April, the Bank cut interest rates by 25 basis points, for the second time in five years, citing the improved inflation outlook and a reprieve from credit ratings agency Moody’s.

At one of the Bank’s regular round-table discussions with economists on Friday, an economist said that while they had expected the repo rate to be cut to 6.5%, it was worrying that the decision was not unanimous as four members voted for a cut while three argued for rates to remain unchanged.

The MPC consensus, as represented by its statement, indicated that the MPC saw the risks as more or less balanced but the split vote illustrated a lack of consensus within the MPC, said Absa senior economist Peter Worthington.

In this uncertain environment, future policy decisions will be highly data dependent and sensitive to the assessment of the balance of risks to the outlook
Lesetja Kganyago
Reserve Bank governor

"The messaging is very confusing and the markets don’t know how to interpret MPC statements with split votes," he said. This was not to say the MPC was illogically unpredictable but just that the decisions were finely balanced and highly data dependent.

Reserve Bank governor Lesetja Kganyago said that there was "a very heated" debate about the decision.

Rashad Cassim, head of economic research and an MPC member, said the "roundtable discussion was an opportunity to engage primarily private sector economists and analysts who closely follow monetary policy with a more specialised technical discussion on the domestic and global economy".

In September 2017, the Bank changed from using the core model to using the quarterly projection model (QPM), and this changed the forecasts.

"In this uncertain environment, future policy decisions will be highly data dependent and sensitive to the assessment of the balance of risks to the outlook," said Kganyago.

The QPM outlines an interest rate path that provides some insight in the possible direction of interest rates, given a certain set of assumptions.

NKC economist Elize Kruger said that while the Bank had stressed there was not an unconditional commitment to changing interest rates in line with the path spelled out in the QPM model, it added a new level of policy communication to the market.

As the Bank cuts rates, the QPM model indicates an interest rate hike cycle. While previously two or three increases of 25 basis points each by the end of 2019 were indicated, one increase of 25 basis points is now implied, with two further lifts projected for 2020.

The introduction of the model signalled that the chances for interest-rate cuts had diminished, said Kruger. She said that the QPM was a broad policy guide "which can and does change in either direction between meetings".

menons@businesslive.co.za

Please sign in or register to comment.