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FIFI PETERS: I think the SA Reserve Bank [Sarb] decision earlier today left a lot of jaws on the floor. When the announcement was made that 75 basis points [bps] is what they were going for, there were seven out of 20 economists surveyed by Bloomberg who had seen it coming.
So let’s unpack the bank’s decision in greater detail. We’ve got Arthur Kamp, who is the chief economist at Sanlam Investments, as well as Isaah Mhlanga, chief economist at Alexforbes.
Isaah, I’m going to start with you. I spoke with you last week. I told you I had made a big bet that I was going to buy the newsroom lunch if the governor increased interest rates by more than 50 basis points. You told me very confidently, sir, that I had nothing to worry about. But I can see that we both were wrong.
Just your take on what the Sarb announced today, and whether it was the right call?
ISAAH MHLANGA: Look, I think yes, we got the call wrong – the high 75bps instead of 50bps. But I think it just shows the uncertainty that we have currently with regard to the inflation forecast. You would see that their own inflation forecast has been increased from 5.9% for 2022 to 6.5%. And for 2023 they now have 5.7%, from a previous forecast of 5%. So it’s an upward adjustment in terms of their headline inflation.
That is where the difference comes from; but the inflation forecast has been significantly adjusted up, but I think it’s still the right call. When we spoke last week, I expected that [the Sarb] would do another 25bps in September and another 25bps in November.
So, if we look over the next six months, they’re still within that range, they can still end up in the same range as my expectation. But I think overall, given where inflation is at 7.4%, it’s still expected to go up before it peaks. It’s the right call to make.
FIFI PETERS: Arthur, I’m not too sure what your call was going into the MPC [Sarb Monetary Policy Committee] meeting. Were you one of the seven economists who also saw 75 basis points coming instead of 50 and, as I asked of Isaah, are you in agreement with what was announced?
ARTHUR KAMP: Good evening, Fifi. No. Well, when it comes to near-term calls on the Sarb MPC, I actually tend not to focus on a specific meeting and try to figure out whether it’s 50 basis points or 75 or anything else. As I said, the real key thing here is where we are going to end up at the end of the rate-hiking cycle. So my own thoughts before the time were 50, but that 75 would probably be discussed. I don’t think it was the wrong thing to do.
I think the big change here, as I already indicated, the forecast, the big thing here was the inflation expectations. The average of [the] inflation expectations survey of the Reserve Bank is now sitting at 6% for this year, and 5.6% for next year. Not too long ago that was at 4.5%.
And so there’s been a material change over the last six to nine months, and I think that’s the worry that the bank has, because it’s also beginning to see wage negotiations – or demands for wages – in some cases in excess of 6%, in some cases in excess of 7%; and in some cases the demands are in double digits. So it wants to get inflation expectations back in line with its effective inflation target, which is 4.5%.
I think it’s quite aggressive but it’s frontloading and hopefully what will happen here is that the more aggressive the Sarb is now upfront, that prevents expectations from rising too far and prevents a wage-price spiral from developing, and therefore it eventually hikes less than it would otherwise need to do if it lets things drift for too long. I think that’s a key part of the reasoning.
And secondly – I’m sure we’ll discuss it – the Fed [US Federal Reserve] matters. The Fed is becoming more aggressive and the rand has been very weak, [so] a small open economy that drives inflation expectations as well. I think those were the key thoughts here.
FIFI PETERS: All right. We’ll discuss the Fed in just a bit, but I also want to discuss what came out. It was so funny to listen to the governor when he was talking about what’s on the table and what is not. I can see that that is a catch phrase now among central bank governors – to talk about things that are ‘on the table’.
Isaah, what he did say is that a hundred basis points was on the table. He was asked a question around 150 basis points and he said no. But one has to wonder whether that might creep up on the table next time around. What do you make of that – the fact that there was a person who thought that interest rates should have gone up even higher? And what does that foretell, in your view?
ISAAH MHLANGA: It tells me that interest rates are still going to go up and there’s a lot of concern about the rising inflation expectations.
But I think the other point that is quite important to note is, if you look at the quarterly projection model it hasn’t changed as far as the rate for 2024 is concerned. Previously it had a terminal rate of 6.74%. The current terminal rate is 6.78%. So no real change, really. It affirms the point that I’ve just made there, to say they have decided to frontload the interest rates.
But if we take a period from 2022 to 2024, what they expect in their models hasn’t really changed in terms of the cumulative interest rate increases. So [they] need to deal with inflation quickly enough so that they don’t have to do a lot more over a long period of time.
FIFI PETERS: We’ve just heard from our Market Watcher who said that dealing with inflation quick-quick has a very crush-crush impact on the economy. I wonder what you think about that in terms of the pressure it does put on the economy, and whether that pressure brings us into a recession.
ISAAH MHLANGA: I think if we just look from the time they started hiking rates in November 2021, they have hiked by a cumulative 175 basis points. If you look at other emerging markets, on average they have hiked by 217 basis points. So the Sarb is by no means aggressive compared to other emerging markets.
And if you take the Fed, if we consider the expectation for next week, which is 75 basis points, the Fed would have hiked by 250 basis points between much of this year and the end of July. That is much more aggressive. So the Fed is much more aggressive than the Sarb.
Other emerging markets in comparison are much more aggressive than the Sarb. So we can’t really say that’s being not mindful of economic growth.
But in any case monthly policy has an impact on the economy over an 18 to 24 month period. It’s not going to be tomorrow. It’s going to be filtering through to all economic agents. We are going to see the impact only over a prolonged period of time rather than immediately.
FIFI PETERS: So Arthur, in terms of what the Fed does, the US Federal Reserve – as Isaah has said, we are waiting for their decision next week. Although these expectations are 75 basis points, we also know that a hundred basis points is possibly on the table. To the point that you made when you said that the Fed matters when it comes to the Sarb, are you saying that our Sarb is not independent of the Fed?
ARTHUR KAMP: No, I’m not saying that per se. But it is clear that we benchmark off the global risk-free interest rate, which is the US. And in a period where the Fed is hiking – and it’s doing it quite aggressively as you indicate, [and] it could stay aggressive for a while still – it feeds through into tightening global financial conditions and we see the impact in the rand. Now, the Sarb doesn’t immediately react to that per se.
But what the Sarb will do is, if that weak rand starts to feed through into price increases that start to fuel inflation expectations and wage demands, and start to lift its inflation forecast, the Sarb will react to that. So effectively it’s reacting to the initial impulse, which was the Fed [decision] results in the weakening currency, [which] results in higher inflation expectations locally. So effectively from that perspective, yes, the Fed does matter.
There’s something else that’s also important here, and that is that we were coming from a very low level.
So, if you look at inflation for the months ahead, one expects it to stay above 7% into the first part of next year. The average forecast that the Sarb has, which is the same as ours for next year, is 5.7%. At the moment the repo is 5.5%. So in real terms it’s not really that restrictive yet, and I think the bigger hit for the economy in the near term is actually coming from the sudden shock and rise in inflation, which is eroding real disposable incomes, and particularly hitting the poorer citizens of our society very hard – and that hits their discretionary spending.
So from that perspective we are not really, from a monetary policy perspective, that restrictive yet.
FIFI PETERS: All right. Okay. So the Sarb is essentially, you’re saying, being that big brother that’s looking out for us, looking out [more] for the poor who are being impacted by higher inflation as a result of the fact that their household budget is more skewed towards the things that are driving inflation right now – being the food costs and the fuel costs. So the Sarb essentially has our back is what you’re saying.
But I’d like to find out ultimately, gentlemen, what this is going to mean for South Africans in the near term? Isaah, we’ve got a debt problem. A whole host of surveys have been done around how most people’s salaries don’t even get them past the first week of the month, let alone to the end of the month. So to those households, what’s this impact going to be?
ISAAH MHLANGA: Look, it’s going to be really difficult for those that have debt to service, that have credit cards to service.
I think that’s where they need to contact their bankers and make arrangements to restructure their repayments before the bank comes to [them]. It’s what qualified financial advisors normally tell you.
But I think beyond that, as far as the economy is concerned, we are not that unique [from] the rest of the world. We continue to feel the negative impacts of what’s going on globally in terms of energy and food prices. Those are common. And to the extent that these cost prices are becoming generalised, to the Sarb’s point they have to protect the poor by bringing inflation down – that is what central banks need to do.
Failure that to do that will result in some of the things that we are seeing, the likes of Sri Lanka, and also in other countries where governments are actually collapsing because populations are protesting against an increase in the cost of living. So the central bank is playing its part to make sure that those costs of living can be contained over the coming months.
FIFI PETERS: All right. So not unique or not suffering from entirely unique pressures here in South Africa, given that everyone’s talking about this cost-of-living crisis.
I suppose what make us a little unique is the record level of unemployment that we have, the fact we haven’t fully recovered the jobs lost in the pandemic, the fact that poverty and inequality and all of that is so high.
Arthur, just your last word then on the economic impact of this rates decision?
ARTHUR KAMP: Clearly I think, as Isaah says, the debt-servicing cost does go up. But the Sarb at this point is controlling what it can, and it can dampen growth and lift growth in a cyclical sense. That’s essentially what it’s doing.
The long-term underlying trend growth rate that creates the jobs and gets the economy vibrant is not controlled by the Reserve Bank. That’s a function of having good infrastructure in place, investing, being productive, focusing on skills development. Those are the things that drive growth.
And when inflation surprises strongly on the upside like this, bad things happen. One of those bad things is that the Reserve Bank responds. So there is this near-term impact that hurts people, but at the same time it is reminding us the bank can do only so much, and to drive longer-term underlying growth in the economy we need a whole lot of other things to happen.
I would finish by saying what we should hope for is that this does start to hopefully stabilise the currency. If we in the near term stabilise electricity, which I think has also contributed to currency weakness, if that [should result] in the rand stabilising and even recovering a bit, that would start to hopefully feed through to fuel costs.
For example, we already have an over-recovery now on fuel this month. Of course, there’s the 75 cents we’re going to lose on the subsidy, and things could still change before the end of the month on oil and the rand price and the rand. But we could get a fuel cut at the end of this in the next month. And if the rand were to steady and strengthen further, that would help. There are no guarantees here. But this is what we saw and the sort of thing we need to hope for in the near term.
FIFI PETERS: Yes. Fingers crossed, I suppose, Arthur. But thanks so much for your time gentlemen – Arthur Kamp, chief economist at Sanlam Investments, and Isaah Mhlanga, chief economist at Alexforbes.