/ 23 October 2009

No parting gift from Tito

South Africa should stop obsessing about interest rates and the effect they have on the currency, according to Kevin Lings, an economist at Stanlib.

The relationship between currencies and interest rates globally is vague at best, said Lings, especially considering the various reasons money flows through markets and for now how these can affect any given currency at any given time.

Lings’s pronouncement came as Reserve Bank governor Tito Mboweni announced, for the last time, the decision on interest rates by the monetary policy committee (MPC). Mboweni said the inflation risks had not changed markedly since the last meeting of the MPC.

The Reserve Bank’s key rate, the repo, was accordingly left unchanged at 7.00%. Mboweni signalled that Eskom’s requests for its tariffs to be trebled in the coming years is a future inflation risk that will have to be dealt with by his successor, Gill Marcus.

The debate around interest rates has heated up as the ANC’s leftist allies, Cosatu and the SACP, have called for the abandoning of inflation targeting and for lower interest rates in a bid to boost economic growth and create jobs.

The strength of the rand in recent months has also created concern in some quarters as it is seen to be further dampening growth and economic recovery. A further cut in interest rates could serve to weaken the rand.

But, argued Lings, given the phenomenon that has seen large flows of investment into emerging markets, such as South Africa, the country was going to experience a strengthening of currency anyway.

He pointed out that although there is logic to the argument that lower interest rates could weaken the currency, South Africa has seen 500 basis points shaved off the repo rate, whereas the rand has performed strongly in recent months.

The range of reasons money could be flowing in and out of a country could include international investments in equities, bonds, commodities or through expenditure on imports.

What is of greater concern, said Lings, is not the relative strength or weakness of the rand, but rather the volatility of the currency. This affects the ability of businesses to plan ahead.

 

M&G Slow