EDITORIAL: Monetary policy committee will talk (Thanksgiving) turkey

The US celebrates Thanksgiving on Thursday, coincidentally on the same day our own monetary policy committee (MPC) announces its final interest rate decision of 2023.

For us, Thanksgiving is mainly the day before Black Friday and the retail splurge that goes with it. For Americans, it is a day when families come together to gather for Thanksgiving dinner, often with a large roast turkey as the centrepiece.

And this is where there is a link of sorts between the two events on Thursday. It’s a matter of celebration this time around that turkey prices are down in the US after a couple of years of sharp increases in food prices. The latest data shows US food price inflation subsided to 3.7% in September, from a peak of more than 11% in 2022.

That’s part of a broader decline that has gained pace in recent months, with the US consumer price inflation now at 3.2%, from a peak of 9.1% in June 2022. All of that has happened without the US going into recession and without unemployment rising much, despite one of the sharpest interest rate hiking cycles yet.

Two years ago, inflation was climbing out of control and the US Federal Reserve was under heavy fire for mistakenly believing inflation was “transitory”, and leaving it too late to hike rates to combat it. Now, the “Team Transitory” folk — led by economists such as Joseph Stiglitz — are claiming victory, saying inflation was transitory all along, that it was simply a result of supply side shocks as the world came out of the Covid-19 pandemic and went into the Russia-Ukraine war.

Now US markets are pricing in an end to the hiking cycle and taking bets on when the cuts will start. Countering the euphoria is the fact that inflation in advanced economies remains above central banks’ 2% target, and despite wary comments from Fed chair Jerome Powell and his European peers.

Pressure off

The hot debate about whether the US indeed has inflation under control and whether the Fed will indeed start cutting in the not too distant future, has material consequences for the rand exchange rate and will be something the MPC will certainly be thinking about as it sits down to deliberate on the state of the world and SA’s economy this week.

If US interest rates have peaked and cuts are in sight, that means a weaker dollar, which should be good for the rand and emerging market assets generally. That in turn helps take some of the pressure off SA’s inflation rate. As it is, the rand has strengthened somewhat since the previous MPC meeting in September.

The latest two months’ inflation figures — August and September — have reflected SA’s consumer price inflation rate rising slightly from its two-year low of 4.7% in July. But core inflation is now at the 4.5% midpoint of the target range, which is a good sign. And in a weak economy, with global food and fuel prices moderating, inflation may well be on a sustainable downward trend.

That should enable the MPC to hold rates for a third consecutive meeting. But the turning point of the cycle is always hard to predict. Most economists believe the committee will start cutting rates next year: the question is when. Some are talking about a first cut in March and some are seeing this only in the second half of the year. Even assuming the committee opts to hold, we can expect it to be its usual cautious self.

One reason is that inflation expectations remain high at just more than 6%, and the Reserve Bank has made it clear it is targeting inflation of 4.5% and wants to see expectations anchored firmly around that target. The other is that risks and uncertainties abound, globally and locally. Globally, if the war in the Middle East escalates, it could yet prompt another oil price crisis.

US electoral politics are a potential risk too, especially as former president Donald Trump starts to look scarily re-electable. Then there are our own elections and whether investors might get spooked nearer the time, as well as our own fiscal and load-shedding challenges.

For now, investors seem to have priced those in. Friday night’s rating affirmation by S&P Global was a sign of stability — at least for now. But in an uncertain, volatile world, one in which the Reserve Bank’s credibility remains one of SA’s key assets, we can expect the committee to talk turkey.