Interest rate unchanged amid improving inflation outlook, an improved current account deficit, and a strengthening rand

The South African Reserve Bank (SARB) was entirely predictable in its decision not to hike interest rates at its September meeting. In one of its easier decisions, the South African Reserve Bank (SARB) left short-term interest rates on hold at 7% at its September MPC meeting.

In a widely expected move - particularly after CPI inflation came out at 5.9% earlier in the week and the US Federal Reserve (Fed) left interest rates unchanged at 0.25% -0.5% the previous day- the decision not to increase short-term rates was justified by an improving (i.e. falling) inflation outlook, an improved current account deficit, and a strengthening rand which is now trading at similar levels against the US dollar to 12 months ago. 

The SARB has now not hiked in each of its last three meetings, after previously hiking by just by 2% at its previous 14 meetings. This muted interest rate hiking cycle (after interest rates were kept unprecedentedly low at 5% between July 2012 and January 2014) nevertheless stands out in comparison to the interest rate policy set by many central banks that still remains exceptionally loose post the global financial crisis.  

In the same week that the SARB and Fed kept interest rates on hold, the Bank of Japan (whose short-term rate is already negative) announced further measured to try to inflate the economy. Unlike in South Africa, where the SARB has been preoccupied with reigning in inflation expectations, these central bankers have mostly been preoccupied trying to re-inflate their economies.  Their lack of success on this front (which has meant they have kept short-term rates close to zero or even negative) for an extended period has made it easier for the SARB not to have to raise rates aggressively in response to tightening monetary conditions elsewhere. 

Unfortunately, while South Africa (and especially indebted consumers) has benefited from a global environment where there has been limited need to raise interest rates aggressively, it has certainly been harmed by a global environment were economic growth (and consequently global inflation) has surprised on the downside. In such circumstances it has been much harder for an export-driven economy like South Africa to create and sustain employment growth.  In this context it’s hard to see how a far looser monetary policy from the SARB would have helped the economy, given how ineffective low rates have been in stimulating economic growth elsewhere.  

The global economy has been mired to sub-par growth for close to a decade now – and this looks set to continue for substantially longer while ineffective global monetary policy remains the only game in town.  South Africans should not rely too much on the end of the tightening cycle and should focus on interventions other than monetary policy to drive economic growth.  

What could be far more material for South Africans in the medium-term is the SARB’s decision to revise upwards its expectation of economic growth from 0% to 0.4% for 2016. This is still a very poor growth number. But it does make it easier for Minister Pravin Gordhan, in his Medium Term Budget Outlook in October, to have a growth forecast closer to the 0.9% he predicted in February. It thus also makes it easier for him deliver a compromised budget that is still credible to the ratings agencies. 

Of course, unless we use the opportunity to reset our priorities and tackle our well-publicised problems head on, this stay of execution from a sovereign-ratings downgrade could be in vain.  And when other central banks eventually start tightening interest rates, we could well find ourselves in a tightening cycle again.