Classic Business Day gets Nedbank chief economist Dennis Dykes on the line about Thursdays interest rate decision from the SA Reserve Bank
STUART THEOBALD: Dennis, obviously we are all a bit nervous about this interest rate decision - are you expecting an interest rate hike?
DENNIS DYKES: Its going to be a very close call - the market certainly is factoring in a 50 basis points hike, and some are actually talking about possibly even more than that. The sentiment is clearly negative at the moment.
STUART THEOBALD: Clearly. We saw the inflation figures come out above the 6% limit at 6.3% on CPIX - does the SA Reserve Bank have any choice in a situation like this?
DENNIS DYKES: They actually do in two aspects. The first one is the explanation clause - as you know in their November 2003 Mid-Term Budget Policy Statement they actually revealed a bit more detail about that explanation clause
STUART THEOBALD: Can you unpack that a bit for us?
DENNIS DYKES: Yes, thats really if there is an exogenous shock in the order of something like the oil price going up, the currency coming down, or food prices going up. Then they need to come to the public as well as the Treasury and explain how long CPIX will remain outside the inflation targeting range
STUART THEOBALD: When you mention exogenous shocks the two main drivers of inflation are the oil price and food prices. Are both of those exogenous in the sense that theres nothing we can do about them?
DENNIS DYKES: Yes, clearly we cant do much about the oil price. On the food price side some of that is locally inspired - but even there its the climate which you cant do too much about - and of course worldwide we are actually seeing food prices at fairly high levels. So if the SA Reserve Bank is looking for excuses its easy enough to come up with those. The other aspect thats important of course is that the interest rate rises starting from June 2006 normally take some time to actually impact on the real economy - and after that it impacts on inflation. So if we raise rates now we are only really going to see some sort of impact towards the end of 2008. We shouldnt really be basing our view on whether to raise interest rates now on historical inflation - that should be based on what might happen over the next eighteen months or so.
STUART THEOBALD: Weve had quite a few interest rate hikes over the last year - is there a lag before those really have the desired effect on the economy?
DENNIS DYKES: Yes, but we dont know if theyve raised sufficiently, or if they might have actually raised too much. As I said it actually takes some time to impact - we will only really know when we look back in about a years time as to whether theyve been successful or not. The interesting thing is if you go back to the last two cuts in interest rates you could maybe talk about those being possibly a little bit over-exuberant. Maybe they shouldnt have cut interest rates those last two times in the cycle if one looks at things like the current account deficit, the over-heating, and the rise in the debt to income ratio. So its not so much about whether theyve been tough enough now, its more about whether they were tough enough at that stage of that interest rate cycle.
STUART THEOBALD: Do you think the minds of the Monetary Policy Committee (MPC) will be preoccupied with sending the right signal of their commitment to tough monetary policy? Isnt it important for them to hike now rather than leave the market thinking that the SA Reserve Bank is a nice bunch that wont strangle the SA economy?
DENNIS DYKES: Yes, thats really what an interest rate rise would
be based on - and thats the credibility factor. People saying
theyve exceeded their inflation target but theyre not actually
raising interest rates. Then of course theres the second round
effects of the increases in food and oil prices, and theres not
much in the way of evidence that there are second round effects coming
through. If you look at CPIX for example - and I scanned through that
several times, because there is a lot of commentary in the market about
how broad-based the increases were - but to be honest its really
food and oil thats coming through in the official statistics.
Article from: www.businessday.co.za