EDITORIAL: SA needs a less reserved bank amid policy and political uncertainty
There are no prizes for guessing why the rand is one of the most volatile currencies in the world
International Monetary Fund economists Nasha Mavee and Axel Schimmelpfennig have taken a close statistical look at why the rand is one of the most volatile currencies in the world. And there are no prizes for guessing the answer, or at least a big part of it. Global factors such as commodity prices and US economic developments, and global perceptions of financial market risk, have a big effect.
But "local political uncertainty emerges as a significant driver of the currency’s volatility", say the economists, who suggest that while SA can’t control many of the other factors, this one it can control. "More policy and political predictability could thus help to smooth the rand’s volatility," they conclude in an article published on the website Econ 3x3.
The crazy SA politics factor was again the cause of the rand’s decline this week, just when emerging market currencies were racing ahead. And it was the narrative that dominated the statement of the Reserve Bank’s monetary policy committee — it left interest rates unchanged as expected on Thursday, but sounded dire warnings about the risk that our politics posed to the rand and hence to the country’s inflation outlook.
Though the committee again suggested that it may have reached the end of the rate-hiking cycle, it cautioned again that this could change — in other words, it could look at more interest rate increases — if the risks rose and the inflation outlook deteriorated again.
All this was despite the fact that the Bank’s inflation forecasts have actually improved somewhat, and the rand is still looking relatively good despite this week’s gyrations. The committee now expects inflation to come back to within the 3%-6% target range in the second quarter of this year, not the fourth quarter as previously forecast, and this year’s inflation rate is now seen as averaging 5.9%, down from 6.2% at the previous meeting in January, with the next two years’ averages in the mid-5% range.
However, the committee made it clear right upfront that political uncertainty was the key concern and that "the risk of further rand weakening overshadows the inflation outlook". And, although Reserve Bank governor Lesetja Kganyago amusingly said that the Bank’s staffers weren’t political analysts but just folk who "tortured numbers until they confess", there’s no doubt that the committee members are watching political developments very closely indeed. As they should be.
The committee made it clear political uncertainty was the key concern
Rightly, they were taking no chances at a time when the rand could crash if the finance minister were to be fired, putting question marks over any and all inflation forecasts.
The only surprise, in a week of such intense political uncertainty, was that one committee member voted for an interest rate cut. Perhaps that was what emboldened market players to price in a higher chance of a rate cut later this year.
An improving inflation outlook has prompted some economists and market players to start pricing in rate cuts of 50 basis points or more starting later this year. The numbers in the committee’s statement on Thursday did show inflation within the target range through the main period that monetary policy targets — which is 12 to 18 months out.
The real question, however, is what level of inflation the committee should be targeting with its interest rate decisions. It is surely not just aiming to ease inflation below the top of the 6% target range; it should rather be trying to get it down, convincingly, nearer the middle of the target range. Otherwise why not just target 5%-6% instead of 3%-6%?
That’s why the market should not get ahead of itself and should keep in mind the committee’s clear message that it "would like to see a more sustained improvement in the inflation outlook before reducing rates".