EDITORIAL: Arc of inflation history bends towards a rate cut
Conditions primed for Lesetja Kganyago to deliver much-needed interest-rate relief
The outcome of the Reserve Bank’s November meeting, in which policymakers decided to keep the repo rate unchanged at 6.5%, was a close affair.
It was probably closer than markets had expected, with two of the five members of the monetary policy committee (MPC) wanting to cut interest rates in the face of inflation readings that have consistently come below forecasts, and the prospect of that trend being maintained.
Of course, the Bank’s forecasts are still indicating inflation averaging more than 5% in 2020, uncomfortably close to the upper end of the 3%-6% target range.
The argument for caution is that inflation too close to 6% will leave governor Lesetja Kganyago with too little room to manoeuvre if there is a crisis — say a blowout in oil prices or the rand due to external factors — and that might cause policy to be more aggressive than it would have been otherwise.
With consumer price growth close to the 4.5% midpoint, there’s less pressure to respond to a short-term shock that threatens a temporary inflationary spike. That definitely would have been the case in 2019. Headline inflation averaged 4.2% in the first 11 months, well below what the Bank was expecting at the start of the year. The rate will probably follow a similar path in 2020.
Eskom and a general weak economy will likely prove to be a dampener on spending and production
In November, the bank said that its quarterly projection model forecasts inflation averaging 5.1% in 2020. Some private sector analysts have suggested a number closer to 4.5% might be more realistic. And considering the state of the economy, it’s hard to argue against people who think even those readings might be too high.
Everything we’ve seen from the retail side points to virtually no increase in consumer demand during 2020, despite the November reading released on Wednesday being higher than economists predicted. Eskom and a generally weak economy are likely to prove to be a dampener on spending and production.
Once short-term geopolitical shocks are discounted, international economic conditions also support the country maintaining its interest-rate differential, even if the Bank relaxes policy on Thursday. This is important as the potential of a rand depreciation if Moody’s Investors Service downgrades our debt is probably something that will weigh on the MPC’s thinking.
The euro area, our main trading partner, is only just emerging from a sluggish period of low growth and inflation that caused the European Central Bank (ECB) to revive its monetary stimulus in 2019. Its biggest economy, Germany, barely managed to avoid a recession, and the ECB therefore won’t be tightening policy soon.
In the UK, Brexit will continue to dominate sentiment and the Bank of England is openly talking about the possibility of cutting interest rates. Market pricing of such a move shot up on Wednesday after a report showed inflation at a three-year low. In the US, Federal Reserve policymakers expect to keep rates steady throughout 2020 as they assess the impact of 2019’s cuts.
Of course, Kganyago’s job isn’t to set rates based on conditions in the US, UK or Europe. Stable and lower rates there help by creating room for him to move and still be comfortable about the outlook for the rand, and therefore imported inflation.
What Moody’s will do and the potential impact for SA remains the big unknown. That’s likely to remain the case until after the event. The same goes for events in the Middle East and the possibility that they flare up and cause a spike in oil prices.
The evidence in front of the MPC should be enough to convince at least one of the three members who voted against a cut in November to make a U-turn, while there’s no compelling reason for either one of the two who wanted a reduction in November to act differently this time, irrespective of recent events in Iraq.
A rate cut on its own will not be a game changer for the economy. But SA desperately needs some injection of positive news, and the conditions allow for the Bank to deliver just that on Thursday.