Even before SA scientists, in November, told the world — to the country's great cost — that they had discovered a new variant of the coronavirus, central banks were already facing a dilemma. Omicron has just made that even more stark, with implications that go beyond monetary policy.
An interesting question for SA is whether the Reserve Bank would have acted differently if it had held its policy meeting just one week later. On November 18, it hiked the repo rate, starting an unwind of an emergency policy setting that had left it at a record low 3.5%. The move was mildly controversial, coming with no clear evidence that the inflation situation had deteriorated.
But it got the endorsement of the IMF, which last week described the 25-basis-point increase as “appropriate and consistent with both the planned gradual withdrawal of monetary policy support and the SARB’s [SA Reserve Bank’s] commitment to price stability.”
It also endorsed recent comments from Bank governor Lesetja Kganyago that he favoured a lower inflation target, though it didn’t get to the technicalities on the debate on the suitability of a point target or maintaining a range with goals that are closer to inflation rates at SA's major trading partners.
We will have to wait and see what conditions the government will deem to be appropriate for the lowering of the inflation target, though as Kganyago has noted in the past, SA is good at making excuses for delaying potentially unpopular decisions. That's why we've had a stagnant economy, record unemployment and broken institutions from airlines to railways.
Interestingly enough, the country's inflation rate, which was 5% in October, can hardly be said to be out of line with that of major trading partners at the moment. The eurozone's annual rate is at a record 4.9% while consumer prices in the US in November increased at a pace of 6.2%, the most in about 40 years. Very few people are still talking about this as being “transitory”.
So there is going to be some tricky messaging for central banks ahead, with the economic effects of Omicron still very much uncertain amid the threat of expanding travel restrictions and countries such as the UK increasing their Covid-19 alert levels. Deeper lockdowns threaten to stall any economic recoveries.
The Bank of England is one of the major central banks holding meetings this week. Having been given a hiding in the market for not delivering an increase that investors had believed to be a given, it was assumed that it would hike in December.
Not any more. Markets are pricing in a less than 40% chance of a hike, from 100% at one point in the last month, according to Bloomberg, which also reported that one monetary policy committee member, Michael Saunders, had argued the case for waiting for clearer data on Omicron’s effect on the economy.
According to the Financial Times, the US Federal Reserve is facing a different dilemma.
An inflation rate of close to 7% is causing unease among politicians who are concerned about the hit on constituents’ living standards, and they want it to move quicker in reducing its monetary stimulus and start raising interest rates. Like other central banks, the Fed is also grappling with the question of whether the economy is strong enough to cope with Omicron.
And then there is Turkey. The lira was down to another record low on Monday ahead of that country’s policy meeting, where the politically captured central bank may cut rates again despite an inflation rate of 21%. It’s down 40% since September, making the rand look like a world beater with its 6% decline.
SA’s next monetary policy committee meeting isn’t until late January, by which time travel bans might be a thing of the past and the Omicron variant’s effect on economies might be clearer.
If the hit to economies globally, and potential spillover to SA, proves to be substantial, the Bank might wish it had held its November meeting just one week later, when it might have chosen to stay put.
What are the chances of it reversing that hike in January? It might be impossible to do it without losing face and admitting it acted prematurely.
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.