By Cees Bruggemans, Chief Economist FNB.
SARB Governor Marcus today announced no change to interest rates, following a two day meeting of the Monetary Policy Committee.
Though there was a tremendous change in presentation style, there was none in policy substance.
The Governor presented her MPC team upfront and it was clear that wide-ranging discussions had taken place to come to the policy decision that was unanimously taken.
Thus there is a clear sense of institutional continuity that no doubt will be widely welcomed by financial markets.
As to the actual decision of leaving interest rates unchanged, it very much focused on the level and behaviour of inflation over the coming year, and the risks to this outlook.
The Governor described CPI inflation as likely hovering around 6% through the coming two years, probably just with the 3%-6% target zone, going by the MPC statement.
The Governor repeatedly emphasized in her presentation that the risks to the inflation outlook were ‘balanced’, which by inference was presumably the reason for keeping rates unchanged.
But nowhere in the MPC statement is there any reference to such perceived balance of risk.
Instead, three-quarters of the statement highlight an absence of risk or other favourable influences on the inflation outlook.
Only right at the beginning of the statement and again right at the end is there a short sentence, mentioning possible electricity increases as the main threat to the inflation outlook, at the second mention also referring to possible second round effects (on expectations and further shaping inflation behaviour).
The elephant in the room is wage behaviour, with the MPC statement at the end mentioning the trend in wage settlements as also posing upside risk to the inflation outlook.
In her commentary, the Governor chose to emphasize the electricity problems as the main risk.
Thus balance to the inflation outlook is achieved because many neutral or positive influences get countered by two major concerns, namely uncertainty about future electricity tariffs and their second-round potential, and wage behaviour.
Other than that, the Governor did project economic recovery, though probably starting slowly, possibly commencing in 3Q2009 but more likely from 4Q2009, with better going from 2010 onward.
As to any future changes in policy, this will technically depend on changes in circumstances affecting the inflation outlook, and especially the risks thereto.
If the economy’s recovery were to disappoint AND the inflation outlook were to positively surprise, with especially the two main negative risks (electricity and wage trends) moderating, one senses policy scope opening up for more interest rate easing during early 2010.
If, however, these conditions are not met, expect interest rates to remain unchanged, potentially for a considerable period of time, probably throughout 2010, and possibly 2011 (though this will very much dependent on circumstance).
Strategically, the SARB was pictured as an institution serving all the people of South Africa, not beholden to any political grouping and striving to achieve and maintain a low inflation environment.
To the extent that the government wishes to explore the mandate of the SARB and suggest any possible changes thereto, the Governor indicated her readiness to participate in such discussions.
In essence, the SARB signaled business as usual, and one would do well to take this as a fact. Be guided by likely changes in the environment as to the likely monetary policy stance one is most probably going to encounter, rather than fearing or expecting any sudden heavy handed changes in institutional make-up or policy formulation.
Credibility is well served by this stance.
Source: Cees Bruggemans, FNB, November 17, 2009.
