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Mboweni will have to make some tough choices soon    10-Nov-00
   Summary :    The evidence :
Price stability vs. growth. These should be complementary, but in the short term are actually a direct threat to each other. The same can be said about Mboweni vs the DoF/govt. Their goals are the same, but issue of timing throws a serious spanner in the works. Both parties (the SARB and govt) have thus far managed to make few enemies concerning interest rates, but the tide is about to turn. Pres Mbeki recently said bluntly that he would allow price stability to interfere with growth and even finmin Manuel has been calling for rate cuts to stimulate the economy. BUT Mr Mboweni has a job at hand and that is to meet his inflation targets as set out by the DoF. Not only does his job depend on it, but the credibility of the SARB. Possible scenarios: The ZAR is weak, trade numbers are starting to deteriorate a little. PSCE is double digit, the oil price will not see the likes of $22 - 24 a barrel again and spill-over effects are evident (PPI). Inflation targets are under pressure and with a 9-12 month lag in place between an interest rate move and the effect on inflation, there is no way that a rate cut can be contemplated at this point in time. This will mean
that either the SARB or the DoF/govt will have to back-track on their promises. MMS SA suggest a rate hike now to curb spill-over effect and probably save the economy an additional 0.5% rate hike Q2 2001. The SARB has indicated that it will not hesitate to react against spill-over effects from an oil price shock, but the time has come to walk the walk. MMS agrees that SARB governor Mboweni was correct to signal a raise in the repo rate a few weeks back, but amid the latest bout of ZAR flu and problems in Latam markets (Argentina), more is needed. Demand will have to be toned down to the benefit of longer term price stability, which is crucial for sustainable economic growth. With local election less than 4 weeks away, any tightening will be very unpopular. Therefor MMS going for an unchanged interest rate call at the MPC meeting next week. Monetary policy is not only more transparent these days, but also more flexible. Shifting to biases in SA does not work and we could easily see a hike followed by a full 1% cut. That is the beauty of a repo system. BUT does Mboweni have the savvy to move against the DoF"s wish? Probably yes. The SARB is independent and its only goal is to meet the inflation targets by "hook or by crook" - a term often used when Manuel explains his strict budget deficits. Should the SARB not be judged by the same set of criteria? Conservatism now, will lead to prosperity to all medium- to long term. Economically SA needs a rate hike. Not to protect the currency, but to price SA debt more realistically within the global context and to curb spill-over effects of a high oil price on the transport sensitive SA economy. The contribution of the higher petrol price to large transport company costs have risen from approximately 29% to 47% this year. This inflation can not just be passed onto the consumer directly. Inflation targeting was sold as a social responsibility to protect the poor and force business to increase productivity. It is not a numbers game. In SA the benefits of financial conservatism is understood, but nobody wants to be associated with the initial costs. A rate hike: Economically YES, Politically NO - where the latter probably still carries more weight.

 

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econometrix 10-Nov-00