The South African Reserve Bank’s decision not to cut the repo rate last Thursday baffles, surprises and disappoints in equal measure.
It now seems like a trick of the mind that Governor Tito Mboweni is the same man who, last August, ”surprised” the markets with a 0,5% cut. Now that gesture seems like nothing more than his personal celebration of the new term on which he was embarking.
The decision becomes all the more frustrating when you listen to Mboweni raise hopes. At the December and last Thursday’s meetings, Mboweni painted a rosy outlook for inflation and then held rates.
Mboweni’s caution is worrying for a number of reasons.
First, it is not clear who he listens to. If he listens to the rich — through the markets — this time they were, according to one daily, ”let down”.
Mboweni seems to allow the future to stand in the way of improving the economy. In October rates were held because oil prices were threatening to spike at more than $50 a barrel. Yet even then the Treasury stated in the medium-term budget policy statement that if oil prices stayed above $50, that would only add 0,5% to inflation.
In December, rates were held to avoid adding fire to consumer spending. This time, they were held because … um … um … truth is, the rich always have something to faff about. Mboweni should have just cut now, as he should have in October.
But the more worrying aspect about the decision is that it displays a lack of courage and imagination. South Africa has spent 10 years going through painful restructuring — that’s people losing jobs. However, the world economy grew by 5% last year, the highest rate in three decades, and the South African economy was well poised to take advantage of benign conditions.
But riding that wave of global growth requires bravery and risk-taking, traits the Bank just does not seem to possess. This year, global growth is expected to taper off. The high wave is probably over for a generation.
The most compelling reason to cut rates is to decrease the real interest rate differential between South Africa and its trading partners, thereby taking some air out of rand strength, and to decrease the cost of capital to encourage fixed capital formation and create jobs or improve efficiency.
Another reason to cut rates is the news that gross domestic product growth for the fourth quarter slowed to 4%, down from 5,7% in the third quarter. It grew 3,7% for the year.
Annabel Bishop, an economist at Investec, reckons the figures ”are robust enough to argue against a rate cut”. Tell that to a retrenched factory worker.