SHOULD central banks be proactive, or reactive to evidence of slowing growth? Depending on what you believe, you’ll get an answer as to what the Reserve Bank should do later this month when its monetary policy committee meets for the 89th time since the formal decision-making process began.
It’s either they cut now in light of a sluggish domestic economy or wait for a possible pick-up, globally and domestically in the second half of the year (hopefully when inflation has reached its peak).
Thursday’s economic data showed evidence of a sluggish manufacturing and mining sector, which is going to make the next meeting of the policy committee much more interesting.
In March, manufacturing production fell 2.5% month on month, compared with a revised decrease of 3.6% the previous month. It was well below market expectations that it would remain flat. After two months of recovery, mining output fell 3.5% year on year.
European struggles to emerge from a recession, weakness in domestic exports, work stoppages and disruptions to various mining operations and the slowdown in consumer activity are the main factors behind the sluggish growth.
In the absence of government intervention to boost the economy — we are still waiting for infrastructure spend to start — markets and economists have taken a keen interest in just what the central bank will do at its next meeting.
And there’s quite a huge difference in opinion.
Judging from bond movements over the past couple of days (bond yields have plunged to a record low) and the local forward rate agreement market — where parties enter into contracts that determine future interest rates — there’s growing belief in the markets we may see a second rate cut in ten months.
On the other hand, economists are expecting the Gill Marcus-led bank to keep rates on hold. Of 20 economists surveyed by a Reuters’ poll, all 20 expect this.
Last week I was of the view that the Reserve Bank may as well cut the repo rate by 50 basis points to boost confidence levels — taking similar action as the European Central Bank, even though our inflationary environments could not be more different.
Now I know that a cut wouldn’t necessarily boost South Africa’s growth overnight, because at 5% our borrowing costs are already at multi-decade lows. For me, a cut is not a solution to the growth question, but rather a boost to morale.
Stanlib chief economist Kevin Lings says the impediments to higher economic growth are largely unrelated to interest rates and, ideally, it is these impediments which should be urgently addressed.
I guess the first step along this path is to reach agreement on a plan and at this stage I’ll take any economic plan made by the government, business and unions. That’s going to take some time, but while we wait for the stars to be perfectly aligned, the economy needs an injection of confidence to halt the steady decline. Economic and political headlines this year are really hammering confidence. And we can’t afford a crisis of confidence, that’s what has Europe stuck in a recession. The only concern is inflation and the credibility of the Reserve Bank if it does not act prudently by keeping rates unchanged. March inflation came in unchanged at 5.9%, which was just below the bank’s upper limit of 6%.
April inflation data will be one of the most awaited pieces of information later this month. It’s been a month where the rand — the biggest upside risk to the number — has strengthened 2.9% against the US dollar. Commodity prices, including international oil, have also been softer because of growth concerns combined with oversupply.