Have you heard that inflation in South Africa is currently -3%, meaning that new Reserve Bank governor Gill Marcus can cut interest rates to, say, 1% — a whopping six percentage points below the present 7%?
A -3% inflation rate suggests that even at 1%, interest rates would still be real, meaning that it would be higher than the inflation rate.
There is a problem in this analysis, though, and that is the inflation figure mentioned is producer inflation, which is measured at the farm or factory gate.
Consumer inflation, which is usedas the yardstick in determining interest rates, remains stubbornly high at 6.1%.
Economists blame the market power of key participants for the wide and stubborn gap between farm and factory on the one hand and the consumer on the other.
Interest rates are in the spotlight this week, with a new governor at the Reserve Bank and an agreement by the ANC and its alliance partners to set up a task team to look at amending the mandate of the Reserve Bank to include job creation in its remit.
Cosatu’s Zwelinzima Vavi has said that interest rates should be 3%. Business heavyweight Cyril Ramaphosa has argued for 5%.
Marcus, who chaired the monetary policy committee (MPC) for the first time this week, left the repo rate unchanged at 7%. It appears she intends to be as tough on inflation as her predecessor, Tito Mboweni, was.
Private sector economists point out that consumer inflation has remained above the target range of 3% to 6% even though the economy has experienced tough recessionary conditions.
The chief culprits preventing substantial drops in consumer inflation include administered prices, those set by government and collusive pricing behaviour by businesses, say economists.
Retail sales figures released this week show price resilience in that retail prices are 9.3% higher than this time last year, even though sales have fallen by 5.1%.
Marcus warned that the uncertainty around the quantum of Eskom’s price hikes and the secondround effects this will have on the economy pose a threat to the inflation outlook. She did not express concern regarding the effect of other administered prices, although she did say that Eskom remained ‘the outlier†in this regard.
Brian Khan, deputy head of research and member of the MPC at the bank, said that the two indices are calculated using very different elements, with the producer price index (PPI) made up of predominantly commodities — more flexible and sensitive to exchange rates fluctuations.
The PPI also includes goods whose prices are not necessarily relevant to the consumer price index (CPI) or have an impact on local consumers he said. Although the bank is not ignoring the impact of other administered prices on inflation, Khan emphasised that electricity price increases are by far its greatest concern.
A research report released by Pan African Capital in September points to the large divergence between South Africa’s PPI and the CPI. At present, the PPI sits at a low of -3.7%, whereas the CPI is 6.1%.
It notes that in an open economy such as South Africa a limited divergence between the CPI and the PPI is expected because each of these indices is subject to a varying set of factors.
But a concerning disconnect is taking place in which the ‘drivers of the CPI inflationary dynamics are de-linked from the production side of the economyâ€, said the research.
Contributors to the problem include administered prices and collusive pricing behaviour by businesses, said the report.
Collusion and anti-competitive pricing have been the subject of a number of recent investigations, ranging from the fertiliser sector to foods such as bread and dairy.
Telecoms firms have come under political pressure to bring down the costs of services. Annabel Bishop, group economist for South Africa at Investec, echoed these sentiments.
The CPI has become partially disconnected from the recession, owing in part to the relentless rise of administered prices regardless of broader economic contraction. ‘These increases are pretty fixed or only rise and as such are impeding the CPI’s rate of decline or disinflation,†she said.
Marcus said that dealing with inflation and the challenges it poses to economic growth are not simply tasks that rest with the central bank.
Instead, it is a ‘national programme — with all parts of the economy and society and government playing their roleâ€, she said.
Marcus was at pains to emphasise that the bank was willing to discuss its mandate and the role it plays in the economy, particularly given the circumstances arising from the global financial crisis.
At present, its role is to protect the currency in the interests of sustainable economic growth as is set down in chapter 13 of the Constitution.
Following an alliance summit at the weekend, discussions will begin in 2010 on a possible change to the Reserve Bank’s mandate to include job creation.
Marcus did, however, emphasise that the bank would not attempt to influence the rate or drop its inflation targeting policy.
Pinstripes and Kaftans
Never let anyone tell you that fashion does not matter.
As Gill Marcus takes over from Tito Mboweni as governor of the Reserve Bank, the change after a decade is as stark as the differences between a free-flowing kaftan, Marcus’s preferred dress, and Mboweni’s carefully tailored suits.
What does a pinstripe suit reveal about its owner and what does a kaftan betray?
In the corporate world a suit is a de facto uniform.
Usually in a dark, sombre shade, a suit suggests a reverence for formality, a tendency towards orthodoxy and an attempt to fit in with other suits from other institutions. It can also suggest stuffiness.
Nevertheless, it suggests its owner is well informed and knows his stuff.
But as much as a suit works to help its wearer conform, it conceals individual quirks and eccentricities.
It implies that an entirely different person is revealed when the suit is peeled off — someone who unexpectedly loves fly-fishing, for instance.
The antithesis of a suit is a kaftan. And by kaftan we mean a long flowing dress worn by a woman, not a man’s long tunic.
Eschewing any formal kind of silhouette, a kaftan suggests a flexibility and openness to engagement with outsiders, which a suit does not necessarily offer.
A kaftan wearer stands out from the ‘suitsâ€, suggesting its owner has a strong sense of self and is unafraid to think independently.
With the independence of thought that a kaftan implies comes the suggestion that how others perceive its owner means little; its owner is unafraid of staring into the bright spotlight.
But the kaftan can conceal much, too.
The flowing, comfortable garment does not necessarily imply that its owner is ‘soft†on tough issues.
Or that a willingness to debate matters means its wearer will be easily led or influenced by powerful lobby groups.
Showing up at her first press conference on Tuesday Marcus more than stood out from her fellow monetary policy committee members in their formal business attire.
She did not flinch under the popping flashes of the numerous photographers gathered before her — something Mboweni was known to have loathed to the point of banning press shutterbugs from the monetary policy committee press briefings.
Despite questions about her position as a political appointment, Marcus was adamant that she was there to do her job as governor, independent of political influence and in the interests of the country.
Her decision to keep interest rates at 7% has already infuriated the ANC’s political ally, Cosatu, which has been calling for a much softer stance on rates.
But she also revealed a willingness to discuss changes to the mandate of the Reserve Bank and to extend to job creation in the face of the global recession and poor economic growth in the country, something alliance partners have long wanted.
Just how far Marcus is willing to push the debate, however, will reveal whether she is hiding a pinstripe suit underneath the kaftan.
