Nicolette Dirk, finance writer, Justmoney.co.za
South Africans will likely not experience the steep interest rate hikes experienced in 2008 due to the country’s slow economic growth.
At yesterday’s Central Banks communicators’ conference dinner, Gill Marcus, Governor of the South African Reserve Bank, said the previous tightening cycle was conducted in very different circumstances to what we are seeing today.
“At that stage, the South African economy was growing in excess of five per cent per annum, well ahead of potential. Credit extension was growing at around 25 per cent and household consumption expenditure growth was around nine per cent. With rising inflation risks, this called for a strong monetary policy response,” said Marcus.
What was the reasoning behind the 2014 interest rate hike?
In November 2013, the Reserve Bank stated that should there be further significant deterioration in the inflation outlook, they would have to take appropriate action.
Marcus said that when the Rand depreciated from R10 against the US dollar in November, to over R11 against the US dollar by their January meeting, it adversely affected capital flows to emerging markets.
“This, together with a reassessment of the possible path of food prices, led to a marked upward revision of our inflation forecast. The risks were assessed to be on the upside and inflation was expected to breach the upper end of the target range for an extended period. This deterioration in the outlook led to an increase in the policy rate, an action that surprised the markets, despite our prior warnings,” said Marcus.
What has changed since 2008?
Marcus sad that today we have a very different situation, with the output gap being negative and subdued growth in both household consumption expenditure and credit extension.
“We would therefore expect the monetary policy response to be more moderate, given our concerns about the slow growth in the economy. I therefore indicated recently that I thought that the market expectation of a further 200 basis points increase over the coming year sounded overdone, and I still believe this to be the case,” said Marcus.
According to Dawie Roodt, Efficient Group economist, the mandate of central banks have changed since 2008 where the sole focus is no longer inflation but economic growth and employment as well.
What can South Africans expect?
Marcus said future moves are highly data dependent in the current circumstances of heightened uncertainty.
“We have no history of tapering or normalisation to guide us. Of course, this moderate base case is highly conditional on developments and we cannot give any unconditional commitments of future policy moves,” said Marcus.
“The effect of electricity shortages had a big impact on the country’s economy. This will also likely cause the Reserve Bank not to raise the interest rates to the same extent they did six years ago,” said Roodt.