30 January 2008
editorial
Johannesburg — WITH a deluge of key data due today and tomorrow, the Reserve Bank's monetary policy committee won't lack for news as it sits down to its first meeting of 2008.
The important thing, though, is that having looked at the new inflation and money-supply figures, it must look straight past them to take a longer view on the outlook.
Monetary policy is always an exercise in crystal-ball gazing, even if the crystal ball is an econometric model, not a shining sphere. The committee has to look ahead to what inflation can be expected to do in the next year or two. In doing that it has also to look back at the measures it has already implemented in an effort to bring inflation under control -- and try to predict when they will have their full effect and how significant that effect will be.
That's not easy: higher interest rates don't transmit through to economic activity in a simple way and they act with leads and lags that are not always predictable. So though there is some science involved, it's as much a case of guesstimating when it's the right moment to stop hiking (or for that matter lowering) rates.
But we believe that the committee has already done enough. It needs to have the confidence to do nothing, despite bad inflation numbers, on the basis that the 400 basis points of interest rate hikes it has implemented over the past 18 months will slow demand in the economy sufficiently and will ultimately serve to bring inflation back into the target range.
Even if it lacked that confidence, the committee would still be well advised to hold on rates this time around. Globally, financial markets are all over the place; global recession is a possibility; and the direction of interest rates in major markets is down, not up. Locally, the energy crisis threatens to cut economic growth by a significant margin. Uncertainty abounds, and that surely makes this the wrong week to do anything dramatic or risky.
A further interest rate hike would not only be risky, it would also be unnecessary. There is already strong evidence that consumers are responding to higher interest rates and that growth is slowing. December new car sales were down nearly a fifth; house price growth is way down; the most recent trade figures show a lower than expected deficit; confidence has come off; household consumption spending had slowed to 4,5% in the third quarter, from 8,5% in 2006, and is likely to slow further as higher interest rates and higher inflation continue to take their toll. The "rebalancing" of the economy from consumption- to investment-driven growth is clearly well under way. The danger of another rate hike is it could take the edge off investment spending too, compromising longer-term growth potential and generally hammering the economy to excess.
Of course, inflation is still in dodgy territory and today's figures won't look pretty, given December's fuel price hikes and continued pressure on food prices. The weaker rand is a risk, too, as is the prospect that we could get steep increases in electricity costs. The committee will no doubt be worried about inflation expectations and whether leaving interest rates on hold will cause it credibility problems.
But at this stage it just has to have the courage to come out clearly and signal its confidence that interest rates are now at the right level to ensure inflation will come down. With enough confidence, it can tame expectations.
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