Rate hikes to be followed by Gordhan’s tough medicine

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Johannesburg - The South African Reserve Bank has done what conventionally was thought to be highly unlikely – and that is raise interests rates at a time when the country’s economic engine is sputtering.

In the immediate term, the extent of the damage that the surprise 50 basis point rate hike will cause is impossible to quantify fully. But what is clear is that the bank went into last week’s monetary policy meeting with one thing in mind: the rand.

The rand’s sudden and steep fall over the past two weeks has meant that the bank must go back to the drawing board on its inflation outlook. It predicts inflation will breach the upper end of the 3 percent to 6 percent target range by the second quarter and, worse still, it sees inflation peaking at 6.6 percent in the final quarter of the year.

Stated plainly, that means South Africans must prepare for more interest rate increases in the months ahead.

As I said in this column last week, the Reserve Bank is starting this year between a rock and a hard place, and this past week should have made this clear.

If the spectre of rising inflation was as a result of a much more robust economic backdrop, the country would somehow be in a position to cope with it. But here we are, beset with an economy that would continue to shed jobs and complicate efforts to tackle what remain our clear and present “dangers” – poverty and inequality. Rather than calling these issues problems, let’s call them dangers.

Granted, the recent ructions in the markets have not only been evident in South Africa but several other emerging markets, especially the so-called Fragile Five – Brazil, Turkey, Indonesia, India and South Africa – have all seen their currencies hammered and money leaving their domestic bond and equity markets.

These countries have all become too used to seeing money chasing their assets as investors from abroad search for high yield. Now though, it is game over as the US Federal Reserve gradually turns off the spigots of easy money, exposing the underlying vulnerability of these developing economies.

From a global point of view, South Africa cannot escape the contagion that has now forced the hand of Reserve Bank governor Gill Marcus so badly, especially in an election year.

Although she acknowledged that “the growth outlook remains of concern”, she also pointed out during her news briefing on Wednesday that “the primary responsibility of the bank is to keep inflation under control and ensure that inflation expectations remain well anchored”.

Well, to me those words were a giveaway about the interest rate hike. Why? Because whenever a central bank governor feels compelled to remind us about his or her mandate, it always means that trouble is upon us and he or she is fine-tuning his or her toolkit to try and ride out the storm. More specifically, it means he or she knows the limitations of the policy options.

And that brings me to later this month, when Finance Minister Pravin Gordhan will present his annual Budget statement before Parliament. Rather than seek to play election tricks with the Budget, he must dish out more tough medicine, as he did in his medium-term budget statement in October last year, when he announced a string of cuts to reduce wastage in government.

To do otherwise would mean South Africa must resign itself to the fact that it would keep living beyond its means and see no concomitant return from the investments that it hopes to make to put the economy on a sustainable path.

Gordhan is the only person who can bring some rational thinking to bear because politicians are already busy doing what they always do best – playing politics – instead of coming to terms with the fact that our economic breathing space is shrinking.

What else can you expect in an election year? Someone else will pick up the pieces while the politicians pick up the votes.


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