Short Note                                                                              17 March 2016

SARB lifts rates  

by Cees Bruggemans          words 400

SARB raised rates by 0.25%, repo rate to 7%, prime rate to 10.5%. Personally, I don't understand why SARB keeps referring to a “dilemma” as if having to choose or trade off between worse inflation and worsening growth, for clearly its policy is of late firmly inflation forecast focused.

It helped to know that the committee vote was a tie, three for and three against an increase, after which the ayes had it. So not everyone is equally committed to higher rates. And this after bringing inflation forecasts down, too. Still, truth be told, my personal inflation experience is double the numbers trotted out by committee. This economy remains a cost-plus semi-indexed reality, which is what makes it so scary that big droughts, big political mistakes, and big Rand walkabouts give big inflation spikes, potentially destabilizing our fragile inflation expectations.

 

The only way to handle that is to threaten….?

And so interest rates keep on going up even when the Fed is on hold and the rest of the world is focused on lower growth and inflation.

And ironically us, too, seeing that SARB lowered both its inflation forecast (too much?) and growth forecast (too little?).

It lowered its inflation forecast to 6.6% (6.8%) for 2016, to 6.4% (7%) for 2017 and to 5.5% for 2018. Core inflation (excluding food & energy) is now 6.2% for 2016, 5.7% in 2017 and 5.2% in 2018. Admittedly, I no longer recognise my own personal experiences in these numbers, which are about double that on a good day (and worse on a bad day, of which far too many lately).

Then again SARB talks of 0.8% GDP growth in 2016, 1.4% in 2017 and 1.8% in 2018, where I also have difficulty in recognising my own environment, now on the downside.

Be that as it may. Let the drought end (and its longer running wrecking), let the political recklessness and lawlessness end (and see the Rand claw back much of its unnecessary lost ground), and watch inflation subside back into the target range, after which SARB undoubtedly gladly will lower rates in recognition of a weak economy.

But with inflation off the reservation, the discipline meted out is severe to keep the goods, services and resource pricing structure under control.

And cowboys don't cry? More rate hikes to come until the tide turns, which may still be some way off.

 

Cees Bruggemans

Bruggemans & Associates, Consulting Economists

 

Website  www.bruggemans.co.za

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Short Profile Dr CW Bruggemans

Chairman, Bruggemans & Associates Consulting Economists

Consulting Economist, Avior Capital Markets

Consulting Economist, Ince (Pty) Ltd

Consulting Economist, Hellmann Logistics (Pty) Ltd

Consulting Economist, Bureau for Economic Research (BER), Stellenbosch

Honorary Professor of Economics, University of Stellenbosch