"I WAS flabbergasted." That's what ETM MD George Glynos was quoted in media reports as saying about last week's interest rate cut. It was the second consecutive surprise from the monetary policy committee (MPC) for analysts, and this has drawn criticism.
Of course, most of it has been muted, as there's only so much governor Tito Mboweni's thin skin can take. (And he's already been riled by guest columnist Mathatha Tsedu earlier this week.) But, to start off with, I'm going to try to defend the governor's actions. Pity it's a bit late in the day to try and get into his good books!
In June, analysts expected a cut and got none. In August, they expected no cut and got one. Is there method in the governor's madness?
True, the decision in June to keep the repo rate unchanged and the prime rate at 11% may have appeared strange, based on a certain interpretation of the media conference after the previous MPC meeting in May.
In May, Mboweni warned that there was little appetite for further rate cuts. But he didn't close the door completely, and leaving it ajar led many to conclude that there would be at least one further cut.
Hovering over the abyss
But this wasn't such an obvious conclusion. One explanation for Mboweni's decision to keep things on hold in June is that matters were delicately poised.
The economy may have been teetering on the brink of a cliff, but it looked as if it might step back and avoid freefall. Mboweni took the leap of faith that recovery was imminent when he decided in June to stop cutting rates, and to take stock of things.
Surely one can't argue with the governor pausing for thought? Especially since the bank's main task isn't to fight recession, but to curb inflation. And, on the inflation front, high wage settlements and Eskom's looming tariff increase were making things difficult.
But then the economy did go over a cliff, Mboweni took stock of things again and decided that a rate cut was the way to go. Still nothing wrong with taking a break in between decisions; it shows a cool head.
That would be my defence if I were the governor. The analysts couldn't be spoon-fed what the MPC's decisions would be, because the economy was so delicately poised that the decisions went down to the wire.
There's just one big problem with this defence. If the governor genuinely thought he would use a recess to take stock of things in June, he should have communicated the possibility of further rate cuts to the markets. He should have made it clear that the decision might only be a hiatus.
Instead, the wording of the MPC statement and the hardline attitude at the media conference created the impression that this wasn't a possible pause, nor a stock-taking exercise.
Caught out by the code
Sanlam economist Jac Laubscher in a very good critique points to the crucial sentence in the final paragraph of the June MPC statement: "The committee is fully cognisant of the fact that there has been signficant monetary accommodation since December 2008."
We all know central bankers talk in code. They have to, because the world is an uncertain place and black or white statements could get you into deep trouble. But this sentence in the MPC statement seemed to suggest that the monetary easing was over. If it was code, it was easy to decipher - but it put analysts on the wrong path.
So, while I can't fault the actions taken - pausing in June, and then cutting in August - I have to take the MPC to task for the way it is communicating with the markets.
I tried - in vain - to defend Mboweni, but unfortunately he has over the past two MPC meetings shown bad judgement in communicating with the markets. There's no defence that stands up, and those analysts who are peeved (to put it mildly) have every right.
A cynic has to wonder what lies behind this communication lapse. Is the bank perhaps not as independent as the constitution would have us believe, and did outside interference nudge Mboweni towards a rate cut when he, personally, opposed one?
It's not a question to which we'll ever know the answer. In fact, the explanation might be a whole lot simpler. Mboweni might just have a mischievous liking for surprising analysts. He likes to keep them flabbergasted...
- Fin24.com