By Kevin Lings

The following are some of the key points discussed at the meeting I had with Daniel Mminele from the Reserve Bank this morning. Daniel is a voting member of the MPC:

• There was no truth to the rumour of an emergency interest rate meeting at the start of this month. It was not discussed at all within the Reserve Bank. It was a misinterpretation of an interview the Governor had with the SABC.

• While much of the inflation pressure is currently driven by international factors (oil and food), the Reserve Bank does belief that there is clear evidence of ‘second-round’ effects creating further inflation pressure.

• The MPC meeting in April did briefly discuss the option of increasing interest rates by only 25bps and not 50bps. But at the current level of interest rates, Daniel feels it makes little sense to increase by 25bps. I would rule this out as an option for the next meeting. There was no discussion of hiking by 100bps.

• The Reserve Bank is heavily focused on inflation expectations and concerned that expectations will continue to rise. It accepts that wages will rise by well above 6%, but would be comfortable if the growth in unit labour cost remained below 6%.

• The single biggest threat to the inflation outlook right now is the pending adjustment to electricity tariffs. The Reserve Bank has made no formal submission to the energy regulator, but Daniel argues that the Bank’s views are well known (they want electricity tariffs to rise by far less than what Eskom is asking for). (In general, Daniel is extremely concerned about the lack of skills at all levels in SA.)

• The Governor attends a meeting of global central bank governors every two months at the BIS. The Reserve Bank is trying to obtain as much information as possible from the major central banks (Fed, BoE and ECB) about the developed-market liquidity crisis and other matters. Daniel stressed that internationally each country is responding to the higher global inflation according to on their own economic circumstances. There is no real unified approach.

• Any discussion of getting rid of the inflation target makes no sense. There is no real discussion about changing the target either.

• The Harvard Study group recommended that the Reserve Bank intervene heavily in the exchange rate market. Daniel feels this would be inappropriate and could have very negative consequences. He would not support that type of policy.

• There is clear evidence that consumer spending is under significant pressure, with more pain to come given the most recent rate hikes. Daniel does not believe that it will be necessary simply to keep hiking rates. They are mindful of domestic real economic conditions.

• It looks to me as if the decision on the electricity tariff change will be delayed to after the June, possibly by about a week.

• A further rate hike of 50bps in June seems extremely likely, but a further 50bps in August could be avoided if the electricity hike is more modest, there is some sign of stability or easing in oil and food prices, unit labour costs remain relatively contained and there is further evidence that the consumer is under significant pressure.

Source: Kevin Lings, Stanlib, May 23, 2008.

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