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Foot-in-mouth disease

SOUTH AFRICAN RESERVE BANK Governor Tito Mboweni isn't the only central bank governor who sometimes puts his foot in his mouth. United States Federal Reserve chairman Ben Bernanke also hasn't handled recent comments to the markets too well. That's seen the US dollar gyrate - and the rand with it.

At issue is what will happen next with regard to US interest rates. The Fed has raised rates 15 times in a row to 4,75% - their highest level since April 2001. It's widely expected that there will be another 25 basis point hike at the next meeting this month. But the million-dollar question is: What happens after 5%?

Does the Fed stop hiking rates for a long while and even later on move to a loosening bias, or will there be a pause and a resumption in rate rises? Or will there be no pause in May, with further rate hikes on the cards?

Those questions are crucial for world markets. For one thing, they'll determine what happens to the US dollar. Bernanke's initial comments - which suggested a pause in interest rate hikes - saw the dollar hit a one-year low against the euro at US$1,27. The reason was that when rates cease to rise, capital seeks out other regions where rates are escalating. The focus shifted to the US's yawning trade deficit and the danger that there won't be enough capital flowing in to finance its deficit.

A weaker dollar is usually associated with a hike in commodities prices, so gold would also benefit from dollar weakness. Even just the uncertainty created concerning the outlook for the dollar has helped the gold price soar to 25-year record highs.

Last month Bernanke, who took over from Alan Greenspan in February, told the markets that "even if in the (Federal open market) committee's judgement the risks to its objectives are not entirely balanced, at some point in the future the committee may decide to take no action at one or more meetings, in the interest of allowing more time to receive information relevant to the outlook".

US investment bank JP Morgan said that comment showed Bernanke "explicitly guided the markets to expect a pause". JP Morgan also noted Bernanke's description of the Fed (which is dependent on economic data) "arriving at information that affects the committee's assessment of the medium-term risks". The investment bank argued that comment was designed to shift attention away from near-term growth and inflation readings to a more medium-term approach.

JP Morgan said: "When combined with the chairman's emphasis on lags in policy transmission and the risk to future growth from the housing slowdown, the building blocks for a pause have been laid."

It all looked so simple. But then Bernanke got worried that he might be viewed as an inflation dove. CNBC anchor Maria Bartiromo then said that Bernanke had told her that the media and markets had misinterpreted his words as a signal that the Fed would pause after one more rate hike. Bartiromo said Bernanke had told her that he intended to indicate that the Fed is flexible, not to brand himself as a dove on monetary policy. The dollar recovered and the verdict was unanimous: Bernanke had created tremendous uncertainty for financial markets.

The uncertainty concerning the dollar was further complicated by the People's Bank of China's unexpected 27 basis point hike in interest rates.

The move initially caused the dollar to weaken against the yen, as expectations were created that the Chinese were going to allow the yuan to appreciate. But those expectations have faded and the focus is now firmly back on US interest rates and oil.

Bernanke isn't really to blame for his case of foot-in-mouth disease. Whereas up until this month US monetary policy was as easy as falling off a log, things have now become much more complicated. Bernanke is walking the line between overkill and laxity - a big challenge for someone who is new at the job. Moreover, the markets can't expect interest rate moves to be spelt out perfectly for them, though predictability is important.

If Bernanke does eventually end up signalling a pause in rate hikes - and his initial comments seemed to favour that route - it will benefit SA.

But don't expect interest rate declines in SA. A strong rand will cushion the blow of sky-high oil prices but won't nudge Mboweni towards loosening policy. He has himself said that the bias is towards tightening policy. If he does the opposite, he'll find himself with his foot in his mouth - again.

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