Reserve Bank governor Lesetja Kganyago. File photo
The last South African Reserve Bank governor to surprise markets with their interest rate decision was Gill Marcus 11 years ago. Citing lower inflation and risks to our economic growth, she cut interest rates instead of leaving them unchanged. The rand weakened that day in July as the shape of the economy weighed heavier than credibility in the eyes of investment bankers in London and New York.
Her successor, Lesetja Kganyago, has been painted into a much tougher corner by an economy that hasn’t grown by leaps and bounds, a fiscus for the most part that has acted in an “austerity-like” manner because of rising debt levels and falling confidence because of never-ending tales of corruption. Under him, the monetary policy committee hasn’t had any room to surprise and for the most part has followed the US Federal Reserve, as have most emerging market economies. Those that haven’t, such as the central bank of Turkey, have lost all credibility in global markets and overseen a collapse of its currency that would make rand watchers blush.
But wouldn’t it be nice if the Reserve Bank surprised us again by simply keeping interest rates as they are and not hiking them by a further 50-basis points? It would annoy economists such as Annabel Bishop, of Investec, who think a 75-basis point rise is necessary to strengthen the rand that’s been on a losing wicket for some time, but it would provide a significant reprieve to the overlooked middle. Although inflation is a concern and outside the bank’s targeted range of between 3% and 6%, it cooled in April (I’ll admit not by much.)
But this isn’t an inflation column, it’s about growth — or rather morale of the middle. The Reserve Bank’s decision to hike or not to hike interest rates is most acutely felt in this segment of society, people who are first-time home or vehicle buyers and more often than not, credit card holders. For the poor, an interest rate decision does have some level of effect on the price of basic foodstuffs such as bread. For the one percent, it’s nothing more than a little irritation.
Load-shedding, higher administrative prices, rising school fees and an unemployment crisis have zeroed in on South Africa’s middle class, denting their confidence levels as it eats into the disposable income. It’s fed into our weak growth prospects because consumption makes up a fair chunk of this economy given that our industrial sector continues to shrink.
Well, that’s my case for a reprieve-nyana, which will no doubt annoy a number of market participants especially in London and New York and they’ll let it be known in the rand’s performance. That being said, a surprise is not in the offing (as I close my eyes and cross my fingers.)
It’s just how capital markets work and why people are thinking of a different future, one without the US dollar as the reserve currency.