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

It is always as important to watch what the Reserve Bank’s monetary policy committee says as what it does and that will be true again this week, when the committee announces whether it has decided to hold, hike or cut.

It should opt for a hold on Thursday. And almost everyone in the market expects that it will, even though a case could be made for a cut and even though the committee may find it ever more challenging to justify why cutting interest rates is just too risky to contemplate.

One thing that has changed since the committee last met is that SA’s economy officially went into recession in the first quarter of 2017. It’s now clear that growth of even 1% will be difficult to attain and that the economy will stagnate again this year and in 2018.

Investment is extremely weak; household finances and consumer confidence are looking worse than they have since at least the financial crisis. The outlook is bleak and there is little demand-side pressure that would drive up inflation.

At the same time, inflation has at last come down below the 6% top of the target range and the inflation outlook is more benign, for now, thanks to a stronger exchange rate and low global oil prices. July’s fuel price cut could help inflation to come in below 5% for the next couple of months, which will surely prompt some excitement about likely rate cuts.

But these are volatile times and the risks, both political and economic, call for extreme caution. The politics of monetary policy loom large over this week’s committee meeting, after Public Protector Busisiwe Mkhwebane called for a change to the Bank’s mandate to eliminate its core central banking function of safeguarding price stability.

That has opened the way to a debate about the Bank’s role and ownership that has caused huge damage to one of the very last South African institutions whose independence and credibility had survived the Zuma administration unscathed.

The Reserve Bank’s institutional strength is one of the few factors preventing SA from being downgraded to junk status across the board by ratings agencies and investors. In that fragile context, a decision about interest rates can’t just be about the economic numbers or the forecasts: it is, crucially, about politics. That means the committee has to make it particularly clear this time that it will make its decision without fear or favour and it will not bow to pressure to go easy on inflation in a bid to try to boost growth.

Not that a rate cut of, say, 25 basis points now and one or two more later would do much for growth or for the majority of poor households, who have to rely on unsecured lending at fixed rates of 21% or more. Those are the households that would suffer most if inflation were allowed to spiral.

And crucially, though inflation is looking relatively benign for now, there are no guarantees that it will stay that way. The political risks to the exchange rate, and therefore to the inflation outlook, are substantial. We have already seen how much the rand exchange rate can be affected by question marks over the Bank’s mandate or other policy and political missteps. There is potential for more of those going into the ANC’s December elective conference, as well as over the next two years leading up to the general election. Monetary policy is effective only 12 to 18 months ahead, so the committee will be watching inflation in 2018, rather than in coming months. And anything could happen.

That is particularly so because the global environment is likely to be much less forgiving of SA’s missteps than it has been in the recent past, with investors starting to show distinct signs of falling out of love with emerging markets.

It is an environment in which the committee cannot afford to cut rates any time soon. Its task will be to make that clear.

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