Lesetja Kganyago. Picture: TREVOR SAMSON
Lesetja Kganyago. Picture: TREVOR SAMSON
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When the Reserve Bank last made a decision on interest rates, two months ago almost to the day, the monetary policy committee (MPC) was already warning that the outlook for inflation was worsening, saying it expected a peak closer to the upper end of its 3% to 6% target range.

While the effect of the increase in VAT announced earlier in 2018 had up to that point appeared to be less than expected, a weaker rand and "higher oil price assumptions" had resulted "in a more elevated inflation trajectory".

In one way or the other, the risks to the outlook were clearly linked to the performance of the rand, though governor Lesetja Kganyago and his deputies have stressed that the central bank does not target the currency.

Nevertheless, they spent a fair bit of time in their statement talking about movements in currency markets, citing the strength of the dollar, which automatically means a weaker rand. They were also worried about the effect of Donald Trump’s trade war with China, which has since escalated rather than calmed, as some market participants may have hoped.

As for the outlook for interest rates globally, it is almost a given that US policy will be tightened further next week, for a third time in 2018. The risk is that SA bond yields will need to rise further to reflect the narrowing risk premium.

They also mentioned the currency’s sensitivity to changes in global monetary policy. Here, they actually mean the US Federal Reserve, which has been the only one of the three major global central banks to raise interest rates, and sentiment towards emerging markets. When we look at what happened since that meeting, it is no wonder that some economists are contemplating the possibility of the bank raising interest rates on Thursday.

Only the currencies of Turkey and Argentina have fallen more than the rand since July 19, with both having fared far worse. Those currencies were also pulled down by domestic drivers from President Recep Tayyip Erdogan’s attempts to control Turkey’s central bank to Argentina’s President Mauricio Macri asking the IMF for an early release of funds from a $50bn deal designed to help the country meet debt obligations for 2019, citing "expressions of a lack of trust in the markets". Those two countries have already responded by raising interest rates aggressively in recent weeks. Turkey hiked its main rate to 24% last week, while Argentina, which sees inflation averaging 35% in 2019, raised its main rate to a staggering 60% late in August.

So it would be clear from these examples that sentiment towards emerging markets has worsened.

International oil prices have also moved in the wrong direction, with Brent crude rising 9% since the MPC’s meeting. Local fuel prices look stable, with the price of petrol in Gauteng up only 6c since early July. That, however, is only because the government decided to intervene and limit the most recent increase to 5c. It is questionable how sustainable such populist measures are and the Bank is hardly going to be counting on that when assessing where prices will go in the future.

As for the outlook for interest rates globally, it is almost a given that US policy will be tightened further next week, for a third time in 2018. The risk is that SA bond yields will need to rise further to reflect the narrowing risk premium.

On the face of it, all the key elements that the Bank looks at have worsened, supporting the case for a response in the form of higher interest rates.

It is a cruel irony that the one thing that may save consumers was probably the worst news of the intervening period. The announcement that the economy shrank in the second quarter, plunging SA into its first recession in almost a decade, can only reinforce the view of the Bank from the last meeting that "demand pressures in the economy are not assessed to pose a risk to the inflation outlook". The dismal economic performance is likely to put further downward pressure on spending, constraining the ability of companies to pass on higher input costs.

In this context, a move to raise interest rates would seem futile and counterproductive, and the Bank should stay put.

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