The South African Reserve Bank (SARB) should cut interest rates and buy US dollars to stabilise the rand exchange rate, Old Mutual Asset Management head of asset allocation Charles De Kock told a media briefing on Thursday.
“If we look at the gain in the monetary conditions indicator, which measures how tight monetary policy has become compared with a year ago, then we believe that the SARB needs to cut interest rates and buy dollars to stabilise the rand.
“We believe that the SARB should have stopped the rand appreciating beyond the R8/$ level, as it will meet its inflation rate target at that level. Rand appreciation beyond R8/$ will result in lower economic growth than necessary and unemployment will rise. Corporate expansion will have been curbed and longer term growth opportunities will have been curbed,” De Kock added.
To back up his argument, De Kock showed that the monthly employment index from the Production Management Index compiled by the Bureau for Economic Research has moved the break-even level of 50 since the beginning of the year, indicating that the manufacturing sector may start shedding jobs shortly.
The rand has strengthened from a worst level of R13,86/$ on December 20 2001, to a best level of R7,04/$ on April 30 2003.
The first interest rate hike last year in South Africa took place in January outside a scheduled Monetary Policy Committee (MPC) meeting. The other 100 basis points rate hikes took place at the scheduled MPC meetings in March, June and September.
The MPC meetings in November last year and March this year saw the SARB say that inflation was improving, but that it was too early to cut.
Most economists expect interest rates to be cut at the next scheduled MPC meeting on June 11 and 12.
On March 20 2003, the MPC said in its statement that “the Reserve Bank has on occasions taken the opportunity to purchase dollars for our reserves on a moderate scale. These operations have helped to reduce the Bank’s net open position in foreign currency from $1.8-billion at the end of November 2002 to $1,3-billion on 13 March 2003.
“Such operations purely represent normal prudent management of the Reserve Bank’s balance sheet as is ordinarily the case in central banking. They are in no way directed at seeking to influence a particular level of the rand, whose value will continue to be set by the market.”
The SARB can and does influence what the market sees as “fair value” by statements such as those on April 23 2003, when SARB governor Tito Mboweni said the rand was not overvalued and he expected the rand’s recovery to continue.
He said at the same time that the SARB did not have an exchange rate target, but only an inflation target.
The reversal in the fortunes of the rand meant that imported producer inflation peaked at 17,4% y/y in April 2002 and then plummeted to only 0,5% y/y in March 2003.
The slowdown in the SARB’s inflation target measure, CPIX, which excludes the effect of mortgage rate changes, has been slower as the March 2003 figure was still 11,2% y/y — well above the 3% to 6% annual average target range — from a peak of 12,7% y/y in November 2002.
The quarter-on-quarter (q/q) seasonally adjusted annualised (saa) CPIX rate dropped to 6,7% in March from 8,4% in February, 11,6% in January and a recent peak of 15,6% in November.
The overall consumer price index (CPI) saw a drop into the SARB’s range with a q/q saa rate of 5,7% compared with 8,9% in February, 12,9% in January and 16,9% in December. – I-Net Bridge