Nazmeera Moola and Lindsay Williams discuss yesterday’s decision by the South African Reserve Bank to hike interest rates.
Lindsay Williams: The South African Reserve Bank’s Monetary Policy Committee concluded a 2-day meeting today and decided that money should be more expensive in South Africa by raising the repo rate from 6.5% to 6.75%, 25 basis points, a quarter of a percent.
On the telephone now is Nazmeera Moola, who is the Deputy Managing Director of Investec Asset Management in Cape Town. On this day, which is a day to give thanks apparently in the United States of America, do we give thanks for this rise, Nazmeera?
Nazmeera Moola: I think the interest rate hike is not surprising but I think it is rather unfortunate.
Lindsay Williams: It is unfortunate, of course, for many people, many people being the consumer, the man and the woman in the South African street but, as an economist, as a financial services professional, do you find it unfortunate?
Nazmeera Moola: I don’t think it is necessary. I think you have had inflation outcomes consistently surprise on the downside through the course of this year. I think growth is weak and the Reserve Bank talks about the fact that they don’t react to first round effects; they react to second round effects, but there is no evidence of second round effects at this point in time yet they chose to hike interest rates. So I don’t see the reason they have hiked interest rates. I don’t understand.
Lindsay Williams: It is interesting, isn’t it, because we have got 150-170 cents per litre fall in the fuel price in South Africa coming up, which obviously ameliorates the short-term pressures on inflation, but I think their argument is that in the long term they see something that perhaps we don’t.
Nazmeera Moola: Well, their argument is that, given the weakness you have seen in the currency this year, the increase in the oil price, which has now subsided, you are likely to see inflationary pressures come through in the future and they are left choosing between acting now or acting later. To quote their statement: “either we act now or we act later”.
I am not convinced, Lindsay. Given the downside surprises to inflation we have seen consistently through this year, I am not convinced that they needed to hike interest rates because there was inevitably going to be inflationary pressures coming through. The fact that the Reserve Bank themselves had to decrease their inflation forecasts between the September meeting and now is evidence of that. If you look at their forecast profile that they published today, it is not far off the profile that we saw from the Reserve Bank in July and they were not talking about rate hikes at that point in time.
Lindsay Williams: Do you think there is international pressure, in other words the fact that they may be behind the curve, ahead of the curve, some other central banks may be ahead of the South African curve? You know what I am talking about in a very round-about way. Do you think that we are out of sync and therefore they are trying to get back into sync?
Nazmeera Moola: I think that they are worried that, as you see financial conditions tightening globally, they are going to be left behind the curve and therefore they need to hike pre-emptively going forward and I think there is some evidence that, if the US raises rates in line with their forecast profile, South Africa will need to hike rates a little bit to maintain a reasonable level of real interest rates. I don’t think we needed to start now.
Lindsay Williams: You don’t like it, you don’t think it was necessary but do you think 25 basis points is meaningful? Obviously, the rand, in very, very thin conditions we must point out, has rallied by 25 cents, something like that, but do you think in the big scheme of things 25 basis points makes any difference from a base of 6.5%?
Nazmeera Moola: Makes any difference to what – inflation expectations or demand levels in the economy? What would you be looking for it to impact?
Lindsay Williams: Impact demand, core inflation, whether it would influence the level of the South African rand (short term, yes, we have seen that), all those things that interest rate rises are supposed to do according to central bank doctrine.
Nazmeera Moola: I think that it has some impact because I think that central bank doctrine, you influence inflation in the future by containing demand and I think we will do that. I just don’t think inflation is being driven by demand at this point in time. I think it is being driven by administered prices, which could well surprise on the upside next year. Eskom could bet a bigger increase than expected but that is not going to be impacted by the Reserve Bank hiking interest rates.
Lindsay Williams: Looking forward, given what you have seen, given what you have heard from Lesetja Kganyago, the Governor of the South African Reserve Bank, what do you think they are going to do next? Is it going to be data-dependent?
Nazmeera Moola: I think it is going to be data-dependent. The statement was not extremely hawkish. I think they justified the move they made. They certainly did not indicate a rapidly increasing path of interest rates so I wouldn’t expect a move at the January meeting. I think it is going to be measured. They are going to be watching the data carefully. I think if inflation continues to surprise on the downside, which I think there is every chance it will, particularly against the SARB’s forecasts, I think what you can see is them on hold in January and perhaps even in March, depending what happens to the rand.
Lindsay Williams: Let’s hope so. Nazmeera, thank you very much for your analysis. That is Nazmeera Moola, Deputy Managing Director, Investec Asset Management, Cape Town.
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