FANews
FANews
RELATED CATEGORIES
SUB CATEGORIES Featured Story |  Straight Talk |  The Stage | 

Will he or wont he? The great Christmas debate

08 December 2008 Gareth Stokes

A rate cut for Christmas? That’s the question Reserve Bank governor, Tito Mboweni and the Monetary Policy Committee (MPC) team will ponder before announcing their interest rate decision on 11 December 2008. And you can be sure he’ll strip all emotion from

You can’t move the target after pulling the trigger...

We’ll use conditions in South Africa’s education system to demonstrate why moving this target is a bad idea. When the new dispensation took over they were at pains to improve the pass rates achieved by school students. But instead of working to ensure that each student hit the targets of excellence dictated by the existing system, they gradually altered these targets by fiddling with exam standards, lowering pass requirements and even replacing the system of measurement. At first glance the higher pass rates achieved each year were something to crow about; but today we know that this approach leaves much to be desired. We now have thousands of students with matriculation passes that are probably not worth the paper they’re printed on. And we’ve effectively added years to the time required to address the country’s growing skills shortages. By changing the target we haven’t helped the pupils, the economy or the country as a whole; but created a mess that’s going to take decades to untangle.

To bring this back to South Africa’s monetary policy, we can either make sure that the pupils crack open the books and learn (by prudently raising and lowering interest rates) or we can adopt a ‘pass-one-pass-all’ policy and shift the inflation target band.

European central banks don’t dictate local policy

Another argument offered up in favour of an immediate rate cut is to point to the massive interest rate cuts in the UK and other European economies. When pressured as to whether these decisions would influence the MPC Mboweni was typically coy: “All I’m saying is that I'm quite convinced that my colleagues at the MPC will take into account the global economic conditions before they take a decision.” Even so, analysts are baying for Mboweni to soften his stance.

But they forget that the conditions in these global economies are streets removed from those on the domestic front. The UK, Eurozone, Japan and the US are already deep in technical recession. Inflation rates in these economies are already low and the talk has turned to stagflation – which is a concept that South Africa won’t have to concern itself with for years to come. Their recent decisions to cut interest rates represent desperate last-resort measures to prevent total economic meltdown.

South Africa, on the other hand, is facing a situation where the economy is slowing down rather than decreasing. We’ll probably only enter a technical recession in the second half of next year – and there’s still a chance that massive government spending will rescue us from that fate.

The petrol price is falling; but

Large price movements or interest rate cuts take a while to filter through the economy. If, petrol is cut by R1.61 per litre (as it was early in December) it takes as much as six months before the benefit passes on to the consumer through lower prices. Unfortunately these price cuts aren’t guaranteed. When an economy goes through a long period of price inflation and rising costs, industries often use the subsequent price reductions to bolster their flagging profit margins. When the massive December petrol price cut was announced the taxi associations went on record that their prices wouldn’t be coming down for exactly that reason.

In January 2009 Statistics SA will use a new basket of goods to measure domestic price inflation. They’ve made a number of changes to the weighting that various goods and services contribute to the overall inflation measure. Economists expect a 2% or more decline in CPI due to this new system of measurement. That’s good news because some of the inflationary pressure is immediately lifted. What remains to be seen is whether physical inflation has turned. And we won’t know that until early in the New Year.

There are some big price hikes that will keep CPI close to the 13% witnessed in August, September and October this year. Wage increases will be the highest on record for nearly a decade, medical aid companies are confidently pushing up prices by more than 10% and future inflation plus price hikes loom at Eskom. Even construction giant PPC has announced a 15% increase in the cement price. It’s definitely too early to argue that inflation is dead – and Mboweni knows it. He might choose to follow the rest of the world and cut rates in December 2008. But if he finds the resolve to stick with his prudent approach he has to wait until new data confirms the reversal in inflation early next year.

Editor’s thoughts:
South Africans aren’t too patient when it comes to interest rates… Many have been urging Mboweni to revise the Reserve Bank’s inflation targeting strategy so that the pain of higher interest rates is confined to history… But moving the target so that you can hit it is defeatist. Do you expect an interest rate cut on 11 December 2008 – or are you happy to wait until next year? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by franklin, 31 Dec 2008
do not forget the increasing population of old retirees who depend on a reasonable interest rate on their invested capital to cover all costs especially their now very expensive health needs
Report Abuse

Comment on this post

Name*
Email Address*
Comment
Security Check *
   
Quick Polls

QUESTION

How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?

ANSWER

Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now