Should analysts and economists publicly raise concerns about issues that affect millions of South Africans? One could argue that if they don’t, they are not doing their jobs.
Yet the handling of the inflation debate has seen South African Reserve Bank Governor Tito Mboweni condemning analysts for questioning monetary policy and demanding that the head of a financial institution explain himself to the Registrar of Banks.
Investec’s concerns about the official inflation figure and the impact that the current weightings in the basket have on overstating the inflation figure are not new either to the market or to the Reserve Bank.
Over the past few months Investec, along with other investment houses such as Deutsche Bank, have met with officials of both Statistics South Africa and the Reserve Bank to discuss their concerns. These are shared by millions of South Africans struggling under high interest rates. Over the past two years the Reserve Bank has increased interest rates by 500 basis points, bringing the prime interest rate from 10,5% to 15,5%.
Apart from some outliers such as Turkey, South Africa has been the most aggressive emerging market to hike interest rates, justified in part by a rapidly rising inflation rate that appeared impervious to monetary policy.
People whose cars have been repossessed or who are at risk of losing their homes may be a bit concerned about the fact that had the new weightings, which are based on data collected in 2005 and 2006, been implemented 18 months ago, interest rates could in all likelihood be 2% lower if real rates were maintained at current levels.
One could then argue that mortgage holders paid R12-billion more in interest over the past year. It is important at this stage to make clear that this is a theoretical argument as no one had this information two years ago and it is not an error of calculation on the part of Stats SA, but rather because of the fact that the new inflation figures are being released two years later than they should ideally have been, namely in 2007.
This delay is owing to a massive restructuring in the way we collect our inflation data. While analysts and the Reserve Bank knew that this data would be released later than is normally the case, and South Africa is better off for the new collection process, it has nevertheless caused a distortion of enormous magnitude.
Looking backwards is not going to help, but it does raise questions about the next interest-rate decision, if indeed South Africa is labouring under interest rates that are too high.
Andre Roux of Investec is not blaming past decisions made by the Reserve Bank, however. He argues that we now know what the new basket looks like. Therefore, if the bank — along with many other analysts — agrees that inflation is now overstated by about 2%, this figure should be made official and the interest-rate decision next month should take this into account.
Although Mboweni has publicly stated that monetary policy will be decided based on the current official inflation figures, it would be highly unlikely that the monetary policy committee (MPC) would make a decision without taking into account the effects of a 2% decline in the official figure when it is released in January next year, especially as monetary policy is forward looking.
However, Roux says the reason it is important to publish an official figure now is to temper the public’s perception of the current inflation environment. “Our concern is that the current official number is being built into expectations for the public. Every wage contract is based on this as well as transport and housing.”
Rental will be negotiated on an inflation figure of 12% to 13% as opposed to 10%, locking tenants into above-inflation increases.
Medical aids and doctors’ fees — in fact, all professional fees — will be increased in line with an overstated inflation number, which, in turn, has an inflationary effect. Inflation expectations are one of the key drivers of inflation and the reason that central bank governors are quick to hike rates to show that inflation will not be left unchecked. Yet this exact strategy is being perverted by inflation numbers everyone knows are too high but are not allowed to say so in public.
In fact, doing so lands you on the wrong side of the almighty governor who announced on radio that Stephen Koseff, chief executive of Investec, would be receiving a call from Errol Kruger, the Registrar of Banks. Although Investec has declined to comment, Koseff did have a meeting with the registrar last week.
If we are living in a country where public issues may not be debated without fear of reprisal, then there is a very real problem with the state of our democracy.
While Mboweni appears to be tetchy as far as public discussion around interest-rate policy is concerned, Stats SA has set up an online forum on its website to debate the new inflation data.
The debate rages
In an interview with the Mail & Guardian, Mboweni said that monetary policy will be based on what the MPC believes the outlook will be going forward, and any new information will be considered.
However, he stated that the numbers suggested by analysts — that inflation is overstated by between 1,5% and 2% — are purely assumptions and that it is not the job of the MPC to make assumptions, but rather to base decisions on the official data. The governor’s major issue is that Investec Asset Management went public with this debate rather than discussing it first with Stats SA.
Andre Roux of Investec Asset Management told the M&G it had spoken to officials at Stats SA and the Reserve Bank prior to the press release. Several other economists, including Michael Biggs of Deutsche, had already raised the issue with Stats SA. Mboweni may not be aware of it, but this was already a discussion point in the industry and within Stats SA.
Many economists, including Kevin Lings of Stanlib and Rian le Roux of Old Mutual, had already been on road shows arguing that inflation was expected to decline by about 2% when the new figures were released in January. In fact, Stats SA has a graph on its website illustrating hypothetically what the CPI graph will look like when the new figures are released. This graph shows a decline of nearly 2%.
Mboweni may not agree with these discussions, however. Patrick Lawley of Stats SA told the M&G he is happy for economists to crunch the numbers and make assumptions, but that Stats SA is not in a position to release official figures until the price collection is completed at the end of the year.
Mboweni’s attitude to “making assumptions” is strange considering that the very nature of inflation targeting requires assumptions to be made around the inflation outlook for the next 18 months. Maybe it is not so much assumptions, but who is making them, that is the crux of Mboweni’s concerns.