13 June 2008
editorial
Johannesburg — LISTENING to the first two- thirds of the monetary policy committee's statement yesterday, it seemed a foregone conclusion that the committee had decided on something much heftier than the cautious 50-basis-point hikes it has been opting for for the past two years.
It described the inflation outlook as "bleak". It pointed to the risks emanating from the possibility of further electricity price increases, petrol and food price increases, and a volatile rand. And then there was the clincher, or so we might have thought.
The Reserve Bank now expects inflation to peak at 12% in the third quarter this year -- double the top of the target range. It is significantly higher than the 11,3% at which inflation last peaked, in November 2002 in the wake of the rand's crash at the end of 2001.
That time around, interest rates were lifted to a peak of 13,5%. Now, after the committee opted yesterday for yet another 50-basis-point increase, the repo rate has reached 12%. Of course there's nothing like the threat of a 200-basis-point hike to make 50 seem modest. Those with a taste for conspiracy will suspect Reserve Bank Governor Tito Mboweni of having talked up expectations so that even those who were calling loudly for rates to be put on hold would respond to 50 with relief.
If that was what the governor was doing, it wasn't all that clever -- the rand took a pounding yesterday. Not so much because the market felt the committee's decision was wrong. But it had been expecting much more.
Markets, and the media, may have overreacted to the governor's recent comment that a 200-basis-point hike was "possible". But the rhetoric has been hawkish. And questions will inevitably be raised about the Bank's credibility.
That's especially so given just how fast the forecast, and inflation expectations, have deteriorated since the committee last met two months ago. Last time, inflation was expected to peak at 9,3% and come back inside the target range near the end of next year.
Now, not only is the peak seen as much higher but the return to target is seen only much later, in the third quarter of 2010. That will make it three years that inflation breaches the top of the target.
This is surely a problem for any inflation-targeting central bank. But SA's central bank is not alone: targeters everywhere are facing the same problem, of higher inflation and slowing growth. They must try to prevent inflationary expectations spiralling. Yet crude responses are not appropriate in this global environment.
They are not appropriate in SA either. Which is why 50 basis points was the right choice. It signals the Bank hasn't lost the inflation targeting plot altogether.
But the committee is, at last, conceding the action it has already taken is having the desired effect, and, implicitly, that the risk of overkill is now real. It could hardly ignore the evidence: first-quarter growth slowed to 2,1%, and though the power crisis was the big factor, it's pretty clear that the economy's growth rate will be below potential this year.
Consumer spending growth has slowed to little more than 3% and household debt is at record levels, amplifying the effect of even a modest hike. Even yesterday's hike is harsh, under the circumstances. And though the bank will have to do some talking to counter its credibility critics, its decision can't be faulted.
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