South African Reserve Bank (SARB) governor Tito Mboweni said on Thursday that the three things on his mind at the moment were strong consumer demand, the weakening current account deficit and whether the SARB was moving with the curve of interest-rates globally, was behind the curve, or ahead of it.
“If I were asked what were the three main things on my mind at the moment, firstly it would be that most of us are not used to such a low inflation rate environment. People are so used to high rates that when rates come down they go on a spending spree — they buy lots of DVDs and many more cars than they need,” said Mboweni.
“There is strong consumer demand — it is very high,” he added.
“The second thing would be developments on the balance of payments, which are also a reflection of strong consumer demand but also of the retooling we might be seeing in companies,” said Mboweni.
Mboweni added that the deficit on the current account should be a concern.
“It means we are spending more than we are consuming and this is causing an imbalance. Part of that might have been as a result of an exchange rate that might have been out of balance.”
“The exchange rate had now adjusted to the realities,” he said.
“There are concerns as if the current account persists as it is the exchange rate will be extremely weak and this means the imported component of inflation will be higher, which means inflation will be higher and it means interest rates will have to go higher,” said Mboweni.
Mboweni said the last issue of importance was the global interest-rate curve.
“The last thing is whether the Monetary Policy Committee is moving along with the curve of interest rates globally, whether it is behind the curve or whether it is ahead of the curve,” he said.
Mboweni added that in his opinion consumers could in theory react immediately to notice by the central bank that rates were going higher.
“In theory the impact on the consumer should be immediate if human behaviour was normal. If there is a reason to believe we won’t proceed then you could act in a certain way. If it is very clear the bank is determined to curb, then people should be beginning to respond. Sometimes it is immediate or there is a lag of six-nine months.
“We are in the realm of psychology and human behaviour,” he said.
“The SARB generally hopes that in 18-24 months there will be an impact on inflation. — but this can be shorter or longer,” he concluded. – I-Net Bridge