Economists split on rate decision

Business Report
August 14, 2007
By Ethel Hazelhurst
Johannesburg - Economists are divided as to whether the Reserve Bank's monetary policy committee (MPC) should raise its official repo rate when it meets tomorrow and Thursday. While a 50 basis point hike, to 10 percent, was seen as inevitable only a few days ago, events on global financial markets have added a new dynamic to the situation. Brait economist Colen Garrow said an interest rate hike "would not be appropriate" at this point. Stock markets globally fell sharply last week on fears of escalating bad debts in certain categories of credit. The all share index fell more than 4 percent on Friday, but recovered 2.5 percent yesterday. Garrow said the Reserve Bank should "take its lead from key central banks", which have pumped money into the banking system to keep rates from rising sharply.
Sapa-AP reported that the European Central Bank yesterday injected €47.66 billion (R442 billion), after pumping in €61 billion on Friday and €94.8 billion on Thursday. And AFP said the Bank of Japan injected ¥600 billion (R36.7 billion) yesterday, following ¥1 trillion on Friday. On Thursday and Friday there was an infusion by central banks of $326 billion (R2.33 trillion) as interbank credit dried up. Garrow suggested the Reserve Bank wait for markets to stabilise before it raised rates. "The MPC doesn't have to wait for its next meeting to make that decision," he said. "It has previously held an unscheduled meeting."However, Andre Roux of Investec Asset Management said a hike was needed to maintain the bank's credibility in its stand against inflation.
And Sanlam economist Jac Laubscher said although concerns relating to bad debt globally created a risk of systemic problems, there was no evidence of such problems in South Africa. And in the circumstances, a rate rise was necessary. The Reserve Bank's benchmark CPIX measure (consumer price inflation less mortgage rates) has breached the ceiling of its target of between 3 percent and 6 percent for three months in a row. But there are other issues the MPC will have to consider. South Africa relies on financial inflows to fund its current account deficit, equal to 7 percent of gross domestic product. And relatively high interest rates attract capital seeking high returns. But rising rates slow equity markets, and foreigners have been investing more in the JSE than in local bond and money markets. So the net effect of a rate rise is hard to predict. Another issue is where the economy is in the business cycle, after a 2.5 percentage point hike since last June. The effects of these adjustments are unquantifiable because the full impact of monetary policy takes up to two years to come through. If a further hike now is one too many, it could tip the economy into a recession by 2009. The fact that 2009 is an election year is a complicating factor, although not one the Reserve Bank is likely to consider. Politicians, however, may be waiting anxiously for the outcome of the MPC meeting on Thursday.