Every monetary policy committee (MPC) meeting is interesting in its own way but this week’s one is quite a landmark. It will be the first under the Reserve Bank’s new “preferred” 3% inflation target, after governor Lesetja Kganyago announced at the July meeting that the committee was now aiming for the bottom of the 3%-6% official inflation target range, where previously it aimed for the mid-point.
This week’s meeting will be the last before finance minister Enoch Godongwana presents his medium-term budget on November 12, a budget that may be as closely watched for whatever the minister says, or doesn’t say, on the inflation target as for whatever he says on fiscal policy.
This week’s meeting comes in the context of a truce between Kganyago and Godongwana over the new lower target, which the minister has yet to endorse. It’s been a fairly dramatic time since the July MPC meeting, which met with a hostile response from Godongwana given that the official target is supposed to be announced by the minister in consultation with the governor.
It’s not that Treasury and its political bosses necessarily disagree with the argument that SA needs lower inflation and a lower, narrower target range. But the Treasury’s own modelling was not yet complete at the time of the July meeting. The Bank was impatient to press ahead with the lower target to lock in the lower inflation rates SA was already achieving. But it was accused of having jumped the gun by taking unilateral action.
To the market’s relief, the tensions have now subsided and the Treasury and Bank are working together. But the minister had said he had no plans to announce a new 3% target at the medium-term budget. So the question is whether the November MPC meeting will again be in this limbo zone in which the Bank has made clear its effective target but the new target is not (yet) SA’s official policy target.
All of which gives special interest to the inflation politics and the inflation outlook as this week’s meeting begins. Especially interesting too are this week’s key releases: the third-quarter inflation expectations survey and the consumer price index data for August.
The Bank’s pitch is that the 3% target will rapidly help to lower inflation expectations and contain inflation itself and that will open the way for it to cut interest rates faster and by a greater magnitude than if we had stayed with 4.5%. The critics accuse it of being too optimistic about the likely outlook, with the risk that the committee might need to raise interest rates if inflation doesn’t behave as hoped.
Important signals
This week’s meeting will provide important signals. The Bank’s inflation forecast will be closely watched. And there is more disagreement than usual in the market about whether the committee will cut or hold. Economists such as those at Goldman Sachs argue the Bank has already done much of the hard work — through restrictive monetary policy — to get inflation down and that there is now ample space for a cut of 25 basis points this week, with several more to follow.
Some others in the market believe that the Bank will use the meeting politically as it were, using a benign inflation outlook to implement a cut that will help to persuade the Treasury and the minister to push ahead with announcing a new official lower target or target range.
Citi’s Gina Schoeman doesn’t buy this “goodwill rate cut” idea at all. The Bank will prefer to keep interest rates marginally restrictive to ensure its preferred 3% target is reached as soon as possible, which means it will keep interest rates on hold until it is satisfied that inflation expectations are low enough to justify further cuts. And she expects an official target announcement only in the first half of next year.
Homeowners waiting to see whether their mortgages will be cheaper by this time next week will no doubt prefer to skip the debating and hope for a rate cut.
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