EDITORIAL: A dull Reserve Bank meeting may be a good thing

In a world in which investors are getting jittery about the outlook for global inflation and interest rates, analysing the next move by the Reserve Bank is refreshingly boring.

Not one of the 19 economists surveyed by Bloomberg ahead of the next monetary policy committee (MPC) decision on Thursday expect a change. The consensus view is that the repo rate will stay unchanged at 3.5%, where it’s been since July 2020.

The Covid-19 pandemic and lockdowns from late March 2020 has seen the Bank deliver a combined 2.75 percentage points in cuts, adding to a 0.25 percentage point reduction earlier that year, when the coronavirus was barely making headlines unless mentioned with reference to China.

The more important question is how long its stance will last. A report on Wednesday, based on a Bloomberg survey of economists, will show that inflation jumped to 4.3% in April. That will be the highest since February 2020, the last release before the national lockdown that would eventually result in the biggest economic contraction in a century.

Due to the resulting collapse in demand, the inflation rate dropped to 2.1% in May 2020 — well below the Bank’s 3%-6% target range — having reached 3% the month before.

The base effects from the sharp slowdown in price increases largely explain the apparent surge now and will not have caused panic among MPC members. Very few economists outside the Bank will read the April report as the start of a trend.

Governor Lesetja Kganyago will see having been able to keep interest rates at 50-year lows as a vindication of past policy. Two months ago, some of SA’s peers in emerging markets, namely Turkey, Russia and Brazil, already tightened policy.

“If you want lower interest rates you have got to have lower inflation,” Kganyago told Business Day a month ago, comments that made it clear the Bank is in no rush to raise interest rates, even though its projection model suggested that policy tightening would start in the second quarter.

If the Bank is going to follow the model, Thursday, as the only meeting in the quarter, will be its opportunity to do so. 

One of the factors that support the argument for the MPC to stay put is the rand’s gains, which have made it the best performer in emerging markets in 2021.

Since the last MPC meeting in March, it has gained just more than 7% against the dollar, meaning the currency isn’t a source of worry about inflation driven through by the price of imports.

What’s also interesting is that the dollar has weakened against most emerging-market currencies since then, despite the release of a report showing US inflation running at the fastest pace in more than a decade. One notable outlier is the Turkish lira, which is down almost 5%.

Traders clearly believe the US Federal Reserve when it says it will keep US rates at historic lows, which is preventing US yields from rising, meaning that holding SA assets remains alluring. That’s not all good news as a yield of 1.65%, compared to 9.49% for US treasuries, also reflects lingering concerns about the sustainability of the country’s debt, despite the benefit being derived from runaway commodity prices.

Rising consumer prices, even with the rate firmly entrenched in the midpoint of the Bank’s target range, is one reason a cut is out of the question, though a plausible argument can be made that the economy could do with more support. Faster inflation will eat into SA’s yield advantage, and encouraging outflows that may destabilise the rand isn’t something the Bank is likely to have an appetite for.

If a reminder was needed that the economy is still in trouble, Eskom’s power cuts this week, and mineral resources and energy minister Gwede Mantashe’s latest argument against increasing the licensing threshold for self-generation of electricity, provided it. But as Kganyago has stated before, impediments to growth from these sources cannot be addressed by the level of interest rates.

SA is drawing significant benefit from predictable and credible policymaking, even if that’s a bit dull.