With all the excitement about, including the disaster at Eskom and the president experiencing first hand and professing shock about how ordinary citizens live, the meeting of the Reserve Bank’s monetary policy committee probably won’t be at the top of many people’s “to watch” list.
But it should, as it comes at a rather interesting time for governor Lesetja Kganyago. Like everyone who has an interest in this sort of thing, he will have kept a close eye on what the Federal Reserve had to say last week, and the swift response in bond markets.
By the end of the week US Treasury 10-year notes yielded less than securities that mature in three months, which is usually an accurate sign of economic trouble ahead, and something that hasn’t been seen since 2007, when the subprime mortgage meltdown was on its way to sparking a global crisis not seen since the Great Depression.
Across the Atlantic, bond yields turned negative, meaning that investors are willing to pay a small fee to the German government for the privilege of lending to it for almost a decade. That’s something that usually takes place in times of crisis, when investors are more concerned about getting some of their money back rather than earning a return on it.
The last time that happened was in 2016, when the UK had taken what has turned out to be a disastrous decision to leave the EU and the European Central Bank (ECB) was still printing cash, with its president Mario Draghi being kept awake by the potential for a sustained drop in consumer prices rather than runaway inflation.
Already earlier this month, the ECB downgraded its growth forecast to just over 1% and abandoned plans to raise interest rates in 2019. The sense that all is not well with the euro-area economy was enforced by data on Friday showing that manufacturing in Germany, Europe’s growth engine throughout the crisis period, had contracted for a third month.
But the most startling U-turn has come from the Fed, which late in 2018 was predicting it would be raising interest rates twice, each time by a quarter point, in 2019. It now expects no hike at all this year and said it may move once in 2020. The latter statement hasn’t done much to enhance its credibility. If it can change its stance so dramatically in a matter of two to three months, why should anyone take seriously what it says it will do a year from now?
Which brings us to our allegedly stubborn governor.
Even his detractors admire his unwavering commitment to protecting the Bank’s independence and his willingness to stand up to politicians. Just think back to the Zuma years and the public protector’s attempt to change the Bank’s mandate, and his forthright response to the pointless debate about its ownership, which has unfortunately been given legs by the fact we don’t seem to have a president who’s willing or able to be equally strong when his party’s members make silly pronouncements.
But, so the story goes, there is also a negative side to the governor’s intransigence and this has left SA with interest rates that are way too high, imposing an unnecessary burden on an economy that’s barely growing and has a socially and politically unsustainable unemployment rate of more than 27%. At a presentation earlier this month Investec Asset Management’s Clyde Rossouw suggested that SA interest rates should be 1.5 percentage point lower.
Looking at the events of the past week, it does feel that while SA is exceptional in many ways, having the world’s most hawkish central bank shouldn’t be one of them.
Eskom has probably ensured that the Bank’s 1.7% growth forecast for 2019 will prove wildly optimistic, and it’s hard to see where inflation will be coming from. Dismal performances by retailers and other consumer-facing sectors indicate that there’s hardly any demand in the economy. While petrol prices are higher and Eskom has been granted inflation-busting increases by the regulator, these are more like an extra tax that’ll probably depress demand further.
Back at the Fed, chair Jerome Powell has effectively admitted that his hawkish rhetoric, and the December hike in interest rates, were a mistake.
The big question coming into the monetary policy committee meeting this week is whether we will see a similar admission from Kganyago. He’s probably too stubborn to concede that the November rates increase was similarly misguided and should therefore be reversed.
But he could still make compelling arguments for rates to be cut, without referencing that decision.
The Bank’s forward-looking measures should confirm that inflation will be contained well within the 3%-6% target and it can now rule out the possibility of tighter policy internationally being a risk for the rand and inflation.
But then there’s always Turkey. The new bout of weakness in the lira on Friday after a mysterious drop in the nation’s foreign-exchange reserves spooked currency traders and contributed to the rand sliding by the most in five months, which will have focused minds in Pretoria.
With Moody’s Investors Service’s latest pronouncement on SA coming at the end of the week, and all sorts of unhelpful noise to come ahead of the May 8 elections, caution will probably prevail.
So expect no mea culpa from Kganyago on Thursday.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.