LAST week I was in a bit of a panic about interest rates. No, not that they would go up suddenly. But I needed to find someone fast who thought the repo rate would rise this year for the Faceoff feature that appears in this week's Finweek. It proved to be a difficult task.
The problem wasn't just that the silly season wasn't over yet, with everyone still on holiday. But what I found when I came back from a fairly long break was that most economists now believe the repo rate will remain unchanged at 7% (prime at 10.5%) throughout 2010.
If that's the case, it will be quite a change for South Africans used to frequent interest rate changes. In all the 10 years that Tito Mboweni was governor of the Reserve Bank, he didn't manage to keep interest rates unchanged for a full year.
Perhaps the former governor suffered from attention deficit and hyperactivity disorder, and needed to do something or else he would go crazy.
As I've argued before, the interest rate cuts in 2004 and 2005 were a step too far, as were later hikes. We had too many violent swings.
But now the markets seem to be betting that Mboweni's successor, Gill Marcus, isn't hyperactive and will manage to keep rates unchanged for a full year.
What the experts say
Of course, this won't happen without her monitoring the economy in detail and motivating her reasons why rates should remain unchanged at monetary policy committee (MPC) meetings. Doing nothing can be hard work, especially if you're Gill Marcus.
As the silly season has ended, I now have a better picture of what analysts think will happen to rates. Nedbank's Dennis Dykes thinks rates should have been cut at the last MPC meeting. He doesn't hold out much hope for further cuts this year, but believes rates will remain unchanged into 2011.
Citigroup's Jean-Francois Mercier was quoted as saying there was some chance of another cut in 2010, especially if the rand remains strong. Otherwise, he was also in the no change camp.
Rand Merchant Bank seemed to hedge its bets a little, with the following comment: "We think the Reserve Bank will keep the repo rate steady at 7% for as long as possible, faciliated by global monetary policy remaining very accommodative for most, if not all, of 2010."
But others disagree. Standard Bank's Johan Botha believes the repo rate will rise by two hikes of 50 basis points each in the second half of the year, as interest rates are normalised from "excessively" low levels.
He argues that by mid-year, the economy will be well out of recession, growing by 3%. Absa also believes in an interest rate uptick in 2010, probably in the fourth quarter.
I disagree with them, but I also don't concur with Dykes's view that interest rates should have been cut further, despite the utter collapse in credit and money supply growth. Yes, it's shocking that private sector credit growth has turned negative (-1.6% in November) - the worst since the 1960s.
The Eskom effect
But the Reserve Bank's mandate remains to fight inflation, and it has to retain a respectable real rate of interest to maintain its anti-inflation credibility. (Real rates are interest rates adjusted for inflation; the real repo rate is the gap between the repo rate and the inflation rate.)
There's a very small gap between the repo rate of 7% and the inflation rate of 5.8%. Inflation is set to rise briefly in the short term before subsiding below the 6% target level again this year, but it's unlikely to drop significantly below 6% over the Reserve Bank's forecast horizon.
The main threat is electricity prices, with Eskom having applied for a 35% increase.
Strictly speaking, the inflation target is 4.5% - the midpoint of the 3% to 6% target band. Mboweni is on record as having said this. However, this narrow focus has fallen by the wayside as SA has been hit by the double whammy of an international recession and sky-high electricity prices. We are now very happy if inflation is marginally below 6%.
My view is that interest rates should remain unchanged this year. Though inflation may not be as low as we would like (4.5%), a hike in interest rates is not the way to attack the effects of electricity prices. Moreover, it will take a while for consumers to come to the party.
South Africans are still highly indebted and suffered a severe shock from the last interest rate hikes. They are therefore unlikely to spend on credit with the same abandon as during the previous upward cycle. There will be little pressure on inflation from demand, which is what the Reserve Bank can control.
It may be unexciting to watch MPC media conferences in 2010, but that's what will be best for the SA economy.
- Fin24.com