It is almost inconceivable that the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) would raise interest rates in the current atmosphere, according to the strategist for Investec Securities, Brian Kantor.
“I would not have raised [interest rates] the last two times. It is quite clear now that the last increase was over the top,” he said.
Kantor also questioned why the escape clause in South Africa’s inflation targeting framework was seen as no longer applying.
“The escape clause was very well drafted, so why doesn’t it apply?”
As a possible explanation he said: “I think Governor Tito Mboweni has put his reputation on the line — that he’s the conscience of the emerging middle class.”
The escape clause was drafted at the time inflation targeting was first introduced in 2000, and originally said that if there was a breach of the inflation target due to an exogenous shock over which the bank had no control, it did not have to keep raising interest rates because this would stunt economic growth.
But in November 2003, Finance Minister Trevor Manuel and Mboweni agreed to change it to an “explanation clause”. The new clause states that when the economy is affected by a supply-side shock and inflation is pushed above its target, the central bank must explain how it will respond to ensure that the inflation goal is met and the necessary timeframe involved.
The MPC meets on January 31 to decide on whether to raise the repo rate again.
“If it was a close call last time, it is almost inconceivable this time,” said Kantor. – I-Net Bridge