The SA Reserve Bank has signalled its willingness to drop interest rates, saying inflation outcomes over the past 10 months mean policy has not been as accommodative as it could have been.
In response to questions from Business Day last week, the central bank said that using real interest rates — which strip out the impact of inflation — as a measure, on balance, monetary policy since 2008 had been accommodative of the weak economy “although the degree of accommodation has declined in the past 10 months in particular”.
Central banks usually describe policy as “accommodative” to describe conditions in which they believe money to be cheap enough to make it easier for businesses to borrow, while tighter conditions imply the opposite.
“This decline in accommodation, measured based on short-term real interest rates, has been caused by an unexpected fall-off in consumer prices, mostly caused by two factors: a sharp decline in the price of imported goods due to rand appreciation early in 2018 and much lower food prices than expected,” the Bank said.
At the last meeting of the monetary policy committee (MPC) in May, the Bank narrowly decided to keep the repo rate unchanged at 6.75%, with two of the five members voting for a 25-basis-point cut. That would have been a reversal of an increase in November that proved controversial in some quarters, coming even as the Bank indicated the inflation outlook had improved.
The Bank, which next meets to decide on policy on July 16-18, has come under even more political scrutiny since then, with debates in the ANC and its alliance partners reignited over its mandate and the extent to which it takes economic growth and employment into account.
It is also a sensitive time in terms of key personnel, with President Cyril Ramaphosa still to appoint a replacement for Francois Groepe, who resigned as deputy governor in January. The term of another deputy, Daniel Mminele, is due to end in June. Governor Lesetja Kganyago’s first term is due to finish in November, though he has said he is ready to serve again should Ramaphosa ask him.
A range of inflation dynamics, including food prices, weak demand in the economy and moderating wage growth had eased inflation, the Bank said.
Lower inflation has resulted in higher real interest rates, which the Bank said had now started to “create space for policy”, which could be interpreted to mean a rates cut sooner rather than later.
In the last MPC statement, Kganyago said that the implied path of policy rates generated by the Bank’s quarterly projection model was for one cut of 25-basis points to the repo rate by the end of the first quarter of 2020. That did not stop some economists from speculating that a reduction may come as soon as July, provided there was not a major increase in currency volatility leading up to the meeting.
Statistics SA data due out on Wednesday will show that the annual inflation rate stayed at 4.4% in May, below the mid point of the 3%-6% target range, according to a Bloomberg survey of economists. In its May statement, the Bank said it expected headline inflation to average 4.5% in 2019, down from a previous forecast of 4.8%. However, it saw the average climbing to 5.1% in 2020, before dropping again to 4.6% for 2021.
The perception that the Bank is overly hawkish has in part been responsible for the growing political criticism, mostly from within the ANC and its allies. Since the last MPC meeting, the Bank has appointed a sixth member to the committee, Chris Loewald, its head of policy and research, and who is regarded as a policy hawk.
A related criticism from political quarters is that the bank effectively now targets the 4.5% midpoint of the inflation target band, which ANC critics argue is not appropriate for the weak economic environment. The inflation target band was agreed to in discussions between the Bank and the Treasury in 2000 when it was first introduced. At the time, it was intended that this would be narrowed to 3%-5% but this never happened.
More recently, the Bank has moved to the midpoint to allow for any unexpected shocks to the economy that might take the rate over 6%. From about 2018, although an explicit announcement was never made in conjunction with the Treasury, the bank began emphasising in a range of speeches that it would prefer inflation at or close to the midpoint on a sustained basis. It argues that there were several advantages in doing so, which included more certainty over inflation expectations and some space for unexpected shocks, such as currency volatility.
“This was in no way a change in the target, but, in line with best practice in other monetary policy frameworks, a better focusing of the intentions of the monetary policy committee within what is [and remains] an exceptionally wide target band.
“The emphasis on 4.5% can be thought of as a response to the very high risk of the period before 2018 of missing the target by having inflation higher than 6%. The focus remains to get inflation expectations anchored closer to the midpoint of the target range,” the Bank said. Business Day asked finance minister Tito Mboweni for comment, but he said he did not want to until after Ramaphosa’s state of the nation speech on Thursday.