SARB Governor shifts goalposts

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By Cees Bruggemans

At first blush, last week’s Monetary Policy Statement sounded again humdrum conventional, only offering a bland hue of policy conservatism.

Indeed the first part made you wonder whether they were prepared at all to lower interest rates further.

When Governor Mboweni came to the part where he said the SARB inflation forecast had not changed much from the December meeting, a continuation of 0.5% rate declines looked after all possible.

Only then to lower rates by 1%.

The fireworks were kept for the Q&A session immediately after the reading of the MPC statement, which has now become obligatory watching, and joyful at that. Few American late night shows could improve on our Governor.

The SARB Governor may have been mandated by the MPC to release its findings and decision, but HOW he delivers this message is very much his own show.

And some show it proved to be.

After apparently expressing similar sentiments overseas recently, the Governor now went public with the admission that he would have preferred a 2% rate cut himself.

For an institution that last year showed no evidence of wanting to be adventuresome, from the apparent fear of being ambushed by any number of risks to its inflation targeting policy, this sudden conversion in favour of outsized rate cuts was rather startling.

But then the experiences overseas have been startling.

Whereas in the December MPC statement it was still piously claimed that South Africa would not merely imitate other countries, but do what was right for its own conditions, there now followed the hint that we were very much aware of what was happening overseas and making it our own, if not quite before time.

Our banking may have been nicely isolated from the global financial crisis, but our exporters and import-competing businesses are clearly not.

Cloud-cuckoo-land is reportedly a very special place, where people completely disconnected from reality dwell in a happy state of ignorance.

The Governor consciously used the phrase while intently staring at the camera, as if having certain politicians and others in mind when making the statement.

We are not alone. We can’t decouple. We can’t hide. The abrupt industrial collapse abroad has sunk our commodity prices and is sinking our export volumes.

Not that any of this is news. It has been obvious since October last year. But apparently we had to wait for last week for this startling realization to be communicated to the nation.

Bad news is on its way, with exports, income and employment losses ahead, potentially of a serious nature.

The Governor insisted, as was his wont last year, that this didn’t mean recession, which he still seems to believe is a state of negative year-on-year GDP declines (whereas annualized GDP declines qualify just as well and are more easily achieved, indeed have probably been a fact these past six months, suggesting the nation has been mired in a deepening recession already for some while).

Anyway, the Governor apparently led the charge in favour of a 2% rate cut in committee last week, but supposedly got nowhere, with a unanimous vote in favour of a 1% cut instead. If so, it must have been a quick meeting?

Just like the one in December, where two individuals (presumably not including the Governor, for then there was no public mention of his preference) suggested a 1% cut, but were reportedly overruled by the committee in favour of a 0.5% cut.

The drama involved last week immediately suggested that the April meeting will now automatically yield another 1% cut, unless held up by unexpected events.

For the facts and the urgency for big rate cuts won’t presumably change, but the perception thereof among MPC members easily could, as already evidenced last week by the acceleration in cutting to the 1% level.

But even this new generous pace of easing was apparently still not to the SARB Governor’s liking for the following day (Friday) he suggested on CNBC Africa, as reported in News24, that the MPC might call an interim meeting before the scheduled April one.

As plausible reason was given upcoming data releases in late February (GDP 4Q2008 being released on 24 February) and other data (presumably monthly sector output releases, credit growth, leading indicators, plunging inflation data, foreign trade data and also eventually the SARB quarterly bulletin for 4Q2008).

This was reinforcement with a difference. Not only does the Governor apparently expect atrocious economic data for 4Q2008 and monthly releases into 1Q2009, with the January 35% decline in car sales presumably the opening salvo. He also seems determined to get his 2% rate cut NOW, if only serially and cumulatively.

If there is indeed an interim MPC meeting by late February or early March (not a given at any stage until one is called), it is presumably to agree another 1% rate cut. Whether at such a meeting the SARB inflation forecast would again be kept largely unchanged remains to be seen.

What all this signaling does do is to create confusion about the eventual end destination and timing of the interest rate cutting cycle.

For if the SARB isn’t changing the inflation forecast, CPI reportedly expected to average 5.5% in 2010, and not much differently in 2H2009, why the sudden tearing hurry now to lower interest rates after the disdain of doing so last December and for that matter last week?

Exporters and the nation facing trouble? For them one needs specifically a weaker Rand. Say another 20% off 10:$ would come in dandy, aiming for a 12:$ goalpost, in order to improve the Rand cash flows of businesses potentially losing 20%-40% of their export volumes and having their export prices slashed into the bargain.

Up till now, supposedly the SARB acted ever so cautiously in not wanting a sudden Rand depreciation, boosting inflation, and requiring interest rates to be raised, never mind lowered.

Have even bigger goalposts belatedly come into focus?

Global ones, implying deflation this year (and thus also imported by us) while trade activity increasingly runs the risk of devastating large parts of our exporters, even at present Rand values?

Is this a context in which a country, along with the entire world, prefers a currency weakening?

Only Japan is condemned at present to accept Yen appreciation, but just about everyone else seems to realize that in a deflationary industrial collapse globally it is paramount to ensure a weak national currency for oneself.

The lessons of a gold standard gone berserk and a hapless Churchill fighting the oceanic swells as UK Finance Minister in the 1920s have presumably not been completely forgotten, just as so much else about 1929 and the tragic 1930s that followed.

So what do we want to know more about?

Does the SARB really believe its own inflation forecast? If yes, is it nonetheless perturbed about what is happening to our exporters and the domestic consequences that menacingly loom? Has it noted the apparent wish of nearly 200 countries to depreciate their currencies?

If yes to all of that, would our SARB also like a weaker Rand, without too much fear of the inflationary consequences (in any case likely to be neutralized by global deflationary trends), but not wanting to be seen to be meddling with managing the currency (and still reaping an unwanted whirlwind or two into the bargain)?

If yes, cut interest rates fast, though not necessarily to zero as other countries have done. Cutting rates fast could bring a modestly weaker Rand, rather than the firming to 9.60:$ seen since late last week (and destined for even stronger levels if US quantitative easing and fiscal aggression eventually succeeds in competitively sinking the Dollar, boosting much else?).

It might work if this is indeed the reasoning (but this is no given, as with so much else).

But then WHERE are we supposed to project the bottom of this interest rate cycle? And by WHEN?

Still in ‘neutral’ territory? But neutral relative to what? A stable real interest rate, given a solid inflation forecast in a steadily performing world?

None of those anchors exist anymore. The world economy is going to heavily underperform, and global inflation this year will be mostly negative – both these items heavily undershooting, presumably dragging our performance in its wake, like being sucked down after the Titanic submerging below the waves.

If so, what is the ‘new’ ‘neutral’? If our inflation is going to be about 5% these next two years, with our exporters in trouble requiring a generously undervalued Rand (and 30% apparently never being enough), with the broader economy also clearly undershooting its 3.5%-4% growth potential as we aim this year for GDP growth of 1% or (much) less, what kind of real interest rate premium should we aim for?

Remember Taylor, the Rule man?

Only last month I muttered something about a 9%-10% prime after feeding some none too fanciful assumptions into his simple equation for countries not fearful of currency ambushes.

But I must say 9%-10% prime sounded rather outlandish, given what has gone before these past ten and more years, and given our many other shock absorbers already providing support to the faltering economy (lower oil price, widening budget deficit, more government spending, undervalued Rand, strong infrastructure investment, enormous global efforts also underpinning us).

But perhaps the SARB Governor is signaling that out there somewhere is a new policy equilibrium, still vaguely formulated on the back of dire global observations, calls for 2% rate cuts and mention of interim MPC meetings possibly being called (yet never of course a given).

And so we have to closely study the evidence, decide what needs to be relegated to Claude the Cuckoo, and what has a firm basis.

It seems plausible that having arrived at prime 14% last week, we may arrive at prime 13% as early as next month at an interim MPC meeting (if one were to be called) and even see prime 12% by mid-April.

This would be 350 points down in four months, and just in time for the general election. Not even the financial markets in all their audacity could have hoped for something so daring. And probably with as bonus a Rand worth 11-12:$ shortly for our exporters.

That is, if we can successfully resist any competitive Dollar devaluation pressures globally in coming month (also most certainly no given if precious metal prices were to lift some more for the same reasons).

Once past the election, we might suddenly find the MPC rediscovering abstinence, which admittedly makes the heart grow fonder, more so even than absence.

We could then still maintain interest rate rigueur (at prime 12% or thereabouts rather than 9%-10% later on if persisting with the accelerated policy easing) and yet perhaps succeed in re-jigging the balance of things.

As to the real intentions of our policymakers, future MPC statements, the Q&A sessions following and subsequent media interviews will hopefully shed yet more light on these vexing questions absorbing the nation.

For now let’s make way for Trevor. This week is all his. But don’t forget the Governor. Next month might be his all over again. As will be April. Just in time for the election. Exquisite, as Mr Zuma once opinioned.

Source: Cees Bruggemans, FNB, February 9, 2009.


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