Interest rates unchanged

WORLD AT SIX, JANUARY 23
Being Tito Mboweni

Two respected economists go head to head on the issue of a possible interest rate hike next week.

Bruce Whitfield:
What about next week's interest rate decision? What do you think is going to happen there? The world is going nuts, you had Ben Bernanke yesterday, the chairman of the Fed Reserve cutting rates in the US by 75 basis points. Did he panic or is it a sensible move? George Soros seems to think that it was right thing to do because governments do need to occasionally, when markets mess themselves up as we have seen happen over the last year or so, they do need to step in and help them out. But should our rates rise or should they stay flat next week? Certainly the inflation picture suggests that we should have an inflation increase. Chief economist at Investment Solutions, Chris Hart joins us first. Chris are you expecting an interest rate increase next week?

Chris Hart:
No, at this stage not. I think in the context of what is happening externally I think the distortions that you start to create by just keeping on hiking I think is quite something. And I think there is increasing evidence that the interest rate hikes are adding to the problem rather than taking it away.

Bruce Whitfield:
But we have got inflation which is likely to top 8 percent as early as the end of this month.

Chris Hart:
Absolutely, but if we have got a cost put in to push inflation and interest rates are adding to those costs, there is certainly a strengthening argument that interest rates might be part of the problem rather than part of the solution.

Bruce Whitfield:
But if we leave interest rates flat, are you saying that he should leave rates flat or are you suggesting that to give us a little bit of stimulus, Tito Mboweni should be cutting rates next week?

Chris Hart:
I think already we are looking at the possibility of a consumer recession. It is not that far off and given what is happening externally, I think we need to bear in mind that inflation is less of a problem to fix up than the calamity of the financial system. Now we don’t face that risk, but certainly an interest rate hike may well suggest that there is a policy mistake. Already there is suggestion that the previous two hikes might even be in policy mistake area.

Bruce Whitfield:
Right, so, here we have got an international scenario were the ECB is keeping rates steady, the Bank of England so far is keeping rates steady. But the US has cut rates by 75 basis points. What are the consequences for us as South Africa if we do fail to at least leave rates flat next week?

Chris Hart:
If we leave rates flat next week, effectively our monitory policy has tightened in any case in relation to the US. There is a possibility that they even cut it further next week. In other words that the 75 basis points might even be, you might get a supplementary cut at the actual meeting of 25 or 50.

The market certainly is already starting to demand that and that gap means that when base start to attract yield seeking capital in greater quantity which is very volatile, it does place the rand at risk. The moment you start cutting interest rates, that money goes and creates volatility on rand and problems. So the less of that kind of capital we get the better. It creates distortions, you are paying away interest to foreigners and it is not really benefiting the economy.

Bruce Whitfield:
Chris Hart thank you very much indeed, the Chief Economist at Investment Solutions. No to an interest rate increase next week.

Razia Khan on the line to us from London, Head of Research and Chief Africa Economist at Standard Chartered in London. Razia, will we see an interest rate increase next week?

Razia Khan:
Well we certainly think that the SARB should think very carefully about the inflation judicatory and if the decision were up to us, yes we would be tightening, even in the face of everything that is going on.

Bruce Whitfield:
Now, why is that? Simply the inflation picture?

Razia Khan:
Yes, I think going back to some of the comments we heard from Chris about inflation been less of a problem, I don’t really buy that at all. I think South Africa has been very fortunate having emerged from this period of very benign growth globally, a benign period for emerging markets and that has savoured the rand and that has helped South Africa to achieve low inflation. But the achievement of low inflation just because there is a targeted framework in place is not something that can be taken for granted.

Inflation expectations matter and that is why, with the very real risk that CPIX go through not just eight percent, but probably peak somewhere closer to nine percent. We think there is still room for the SARB to have to act, even given everything else that is going on in the economy.

Bruce Whitfield:
But the global economy is slowing dramatically. Here you have got Ben Bernanke pouring liquidity into the markets, cutting rates in the US by 75 basis points. An exceptional move, at exceptional times. In South Africa we have got not only the issues around inflation, but we have also got a growth crunching issue with electricity or a lack of electricity. This economy may just need some extra support.

Razia Khan:
Yes there are increasing concerns on the supply side, but I think the electricity shortage needs to be placed in context as well. Why has it resulted? Probably because growth has exceeded the hopes of a lot of people. The South African economy has been growing very strongly. Perhaps it has gone beyond the point that is easily sustained.

There has been a role for interest rate policy in tempering that demand and helping to slow it down. What we see is a US economy that is slowing down. There has been a policy response to that weakness in the economy.

There is likely to be greater concern about just how much more of a slow down we are going to get in global growth. In those circumstances, it is very unlikely that we will continue to see this benign environment with a lot of new capital flows into emerging markets.

Risk aversion is likely to rise and as we know from the past, that has always created problems for the rand. The rand is susceptible to those outflows from South Africa. Failing to tighten interest rate policy in response to a very real inflation risk might worsen that.

Bruce Whitfield:
Razia Khan thanks very much as always. On the line to us from London, Regional Head of Africa at Standard Chartered Bank. Who would like to be Tito Mboweni next week? Stick up your hand. I don’t think anybody would. Two perfectly logical arguments from two perfectly clever and logical people telling you exactly polar opposites and that is I suppose one of the intrinsic laws of economics.
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From iafrica.

More than a week old, that discussion. I think, on balance, it is a good thing that they did not change the rates...I think...
 
OORRAY!!! at least now I can hang on until I get that increase in April
 
hj2k_x said:
A weakish Rand is good for the economy, but the chaos that is currently ensuing throughout the world's economy is not...
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To an extent, for those industries who export. Also remember that we are also importing a lot of stuff as well that has to now be paid for with a weaker currency.
 
fivelza said:
To an extent, for those industries who export. Also remember that we are also importing a lot of stuff as well that has to now be paid for with a weaker currency.
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Ya, like computer part prices move almost directly in relation to the exchange rate. As long as we can still power the mines, I think that we will export far more than we import.
 
hj2k_x said:
Ya, like computer part prices move almost directly in relation to the exchange rate. As long as we can still power the mines, I think that we will export far more than we import.
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The country's current account will be indicative of the balance between imports and exports. While the mines etc export plenty, we now are also spending plenty on imported kit to solve our power problems as well.
 
We work on an inflation based interest rate. Whilst I understand why rates were unchanged, I feel it is just delaying the inevitable and next time round we will have a hike larger than what would have been expected had rates gone up now. Inflation targets were stretched for this decision and its not sustainable from the "reverse banks" point of view. Expect a hike next time round, because the electricity cuts will not impact inflation as some believe. I hear it actually drives inflation - not sure I completely understand why it might drive inflation but will look into it more.
 
DJStealth said:
We work on an inflation based interest rate. Whilst I understand why rates were unchanged, I feel it is just delaying the inevitable and next time round we will have a hike larger than what would have been expected had rates gone up now. Inflation targets were stretched for this decision and its not sustainable from the "reverse banks" point of view. Expect a hike next time round, because the electricity cuts will not impact inflation as some believe. I hear it actually drives inflation - not sure I completely understand why it might drive inflation but will look into it more.
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The only link to inflation I can think of is that with the load shedding our factories etc cannot produce enough, therefore products become scarcer resulting in demand exceeding supply, which fuels inflation.
 
DJStealth said:
We work on an inflation based interest rate. Whilst I understand why rates were unchanged, I feel it is just delaying the inevitable and next time round we will have a hike larger than what would have been expected had rates gone up now. Inflation targets were stretched for this decision and its not sustainable from the "reverse banks" point of view. Expect a hike next time round, because the electricity cuts will not impact inflation as some believe. I hear it actually drives inflation - not sure I completely understand why it might drive inflation but will look into it more.
Click to expand...

Cost push inflation would cause this. Caused by large increases in the cost of important goods or services (i.e. power) where no suitable alternative is available.

Demand pull inflation as well maybe? - "Too much money chasing too few goods" would probably affect the CPIX, certainly from a statistical point of view.
 
I think leaving the rate unchanged is probably the right decision for now... but I realised something scary. The inflation rate only has to go up a little bit to actually be higher than the interest I'm getting at the bank.

So while I think I'm making money in interest, I'm actually losing it all to inflation :(
 
Box2Boxmidfielder said:
Cost push inflation would cause this. Caused by large increases in the cost of important goods or services (i.e. power) where no suitable alternative is available.

Demand pull inflation as well maybe? - "Too much money chasing too few goods" would probably affect the CPIX, certainly from a statistical point of view.
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Straight out of Macroeconomics I clearly :D Pretty much the only thing I remember
 
fivelza said:
The only link to inflation I can think of is that with the load shedding our factories etc cannot produce enough, therefore products become scarcer resulting in demand exceeding supply, which fuels inflation.
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I sort of see merit in this arguement but I still believe that the resultant affect on inflation will be a negligible one. Not significant enough to cause inflation to grossly exceed targets.

Box2Boxmidfielder said:
Cost push inflation would cause this. Caused by large increases in the cost of important goods or services (i.e. power) where no suitable alternative is available.
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No cost impact yet thankfully however I see it increasing the price of household items in the future as overheads increase for producers. This affect usually takes a while to kick in and is a fairly gradual one. Very difficult to correlate in y2 what the affect of last year's power increase had on inflation.

Box2Boxmidfielder said:
Demand pull inflation as well maybe? - "Too much money chasing too few goods" would probably affect the CPIX, certainly from a statistical point of view.
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Statistically speaking yes, but what goods are likely to become so necessary that we would see this affect? Electricity yes, but there are no alternatives so its limited to supply in this case and not demand. And generators which just cannot have any impact on CPIX. The only way I see this happening is if 10million people all go and finance a new generator tomorrow.
 
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DJStealth said:
I sort of see merit in this arguement but I still believe that the resultant affect on inflation will be a negligible one. Not significant enough to cause inflation to grossly exceed targets.
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Correct, the biggest inflationary pressures are coming from food and fuel.
 
I don't like it.

We are already almost 3% off the target band. Electricity prices are bound to go up and so is milk due to the possible fixing. Overall prices will also go up (Food going off, massive lost production, mines shutting down). Combine that with the upcoming Zuma thing and a slowing US economy...slight stagflation tendency Eish:(

I think they should have hit the one problem that *can* possibly fix (inflation) harder instead of taking a half-hearted middle ground.
 
HavocXphere said:
I don't like it.

We are already almost 3% off the target band. Electricity prices are bound to go up and so is milk due to the possible fixing. Overall prices will also go up (Food going off, massive lost production, mines shutting down). Combine that with the upcoming Zuma thing and a slowing US economy...slight stagflation tendency Eish:(

I think they should have hit the one problem that *can* possibly fix (inflation) harder instead of taking a half-hearted middle ground.
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Yeah - pretty much what I meant about being unsure whether it is good news or not.

Also, the RB may be more worried that they let on about the effects of this power crisis. The economy may well be about to stall.

We were off today for 4 of 8 hours, and due off again at 6pm.
My home office was off for 2 of 8 hours.

Not looking good.
 
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