Reserve Bank Governor Tito Mboweni’s surprise rate cut last week jolted markets out of their slumber and provoked a noisy stir among financial journalists who had been lulled by a series of non-events at his media conferences.
Much of the coverage has missed the central drama of the announcement. Mboweni has undergone a Damascus Road experience — but unlike St Paul, has failed to communicate it properly to unbelievers.
At the last monetary policy committee (MPC) meeting in June, and in public addresses since then, he said the bank believed inflation might breach the upper limit of the 3% to 6% target range — misleadingly suggesting that a cut was unlikely.
The largest factor to change the Reserve Bank’s stance since the June meeting has been the inflation outlook. The bank now believes inflation minus mortgage rates (CPIX) will stay within the target range of 3% to 6% over the next two years. One reason advanced for the cut is that the Reserve Bank has succumbed to pressure from trade unions and the mining industry to weaken the rand. This is unlikely.
First, the pressure Mboweni faces now, especially from his former comrades, cannot compare with what he faced two years ago when he hiked rates to rein in inflation caused by the December 2001 rand crash. As he is armed with a new contract it makes no sense for him to cave in now.
Also, the insinuation of weakness ignores the structure of the MPC. As I see it, Mboweni is the public face and flak-catcher of the MPC. Behind him, Deputy Governors Xolani Pallo Guma and Ian Plenderleith have the qualifications and experience to bring rigour to the setting of rates. Mboweni insulates them from any criticism they might face, allowing them the space to operate rationally.
The rate cut also serves to remind financial markets that while it is sensitive to their needs, the Reserve Bank also has to consider the poor majority, who need a growing economy.
Lumkile Mondi, chief economist of the Industrial Development Corporation, welcomed the cut. Around the time of the national Budget in February this year, Mondi believed there was room for a two percentage-point cut. Last week he felt the Reserve Bank could have cut by a full one-percentage point. Mondi’s main concern is that the economy is growing in an unbalanced way, with the domestic sector driving growth through higher disposable incomes. He calls for industrial policy co-ordination that ensures exports grow briskly and consistently. The sector has suffered from poor growth in Europe, the destination of 32% of South Africa’s exports, and a strong rand.
One of the ways the Reserve Bank can influence the rand level is to narrow the interest rate differential between South Africa and the United States and Europe. Last week’s rate cut achieves that.
Mondi maintains that relations between the bank and financial markets remain sound — and that tension between the two is healthy, as it underscores the bank’s independence. If oil prices come to about $30 a barrel, he believes there is room for another cut before the year is out.
In the end, Mboweni broke the mould and did what was right for the economy. His failure was in failing to alert the markets — a misstep, but a much smaller one than stubbornly standing his ground.