It is, to be sure, a time like no other. On Wednesday the JSE touched a record high of 21 000, at one point trading at 21 150. When the JSE started its current rally two Octobers ago, it did so in defiance of a strengthening rand. That trend continued this week as the record was touched, just as our currency broke through the R6 to the dollar level.
The reason for that, of course, is the JSE’s peculiar resource bias, which means that record commodity prices, such as gold at a 25-year high of $600, drive the bourse and strengthen the rand.
But this week’s record was also in defiance of high oil prices, as Brent Crude touched a record $72 a barrel. For as long as the rand strengthens, South Africa remains protected from imported inflation.
But amid the deafening cheers, there were also noises, perhaps unsurprising, from Reserve Bank Governor Tito Mboweni, who said that the fun may be abruptly ended by an interest rate hike, or even a series of these.
These warnings took us back to the days of the famed Open Mouth Operations (OMO). A few years ago, when inflation targeting was a nemesis of trade unions, Mboweni used OMOs to contain inflation expectations. He did this by continually threatening to hike rates if inflation did not come under control. This worked like a charm.
Now, it seems, Mboweni wants to use the threat, rather than the actual act, of a rate hike to contain runaway credit consumption. We can only hope that it never materialises. For that would raise questions about who Mboweni listens to and, thus, in whose interest the economy is managed.
Brian Kantor, the mellifluous guru who heads economic research at Investec Securities in Cape Town, points out that there is little Mboweni can do at present. “These are extraordinary circumstances and there is very little [Mboweni] can do except to wait.”
That is because we are in the midst of high growth and low, or no, inflation, which Kantor forecast last November. If Mboweni were to raise interest rates, it would simply, and needlessly, strengthen the rand by widening the interest rate differential with key parts of the globe and attracting more foreign funds.
Kantor notes that as long as commodity prices remain at current levels, there is little South Africa can do except “to enjoy it while it lasts and wait until circumstances change”.
In fact, Kantor says there is very little room for monetary policy influence now and if Mboweni were forced to choose between a cut and a hike, the latter would be a sensible option, in the hope, but with no guarantee, that it would take some strength out of the rand.
This boom raises questions about whether monetary policy is an art or a science.
Mboweni clearly treats it strictly as science with little room for nuances. At the Reserve Bank annual general meeting, a question was asked whether, in the event that the government’s targeted growth rate was accompanied by inflation, he would be flexible and allow the inflation target to be breached by this “positive” inflation.
He stuck to his dogma: “[My] job is to keep inflation within its target range, and nothing more.” Later, at his year-end media function, he told reporters how statistical models were telling him that the economy is overheating and he thus could not cut interest rates.
So, one day, when this boom is over, we will wonder whether enough was done to bring down the cost of capital and help increase the number of new, but inadequate, jobs created. The answer, in relation to interest rates, has to be no.
The kind of voices that Mboweni listens to are probably those of fund managers, 73% of whom in this month’s Merrill Lynch Fund Managers Survey said they expect a rate hike in the next 12 months. Yep, the money men have eaten more than a generation can handle; why risk turbulence trying to help the unemployed?