SARB Should’ve Been Hiking Rates for Months Now

At ETM Analytics we’ve been saying this for years now. The SARB should’ve been hiking rates starting in early 2012 already to avoid the market forcing it on the economy at a later stage in a disorderly fashion. Interviews where my colleagues and I make this point publicly follow after the link.

Back in March 2012 my colleague Russell Lamberti argued strongly for higher real and nominal interest rates in SA at the time, because this will rid the economy of imbalances that will ultimately manifest in rising inflation, a falling currency and rising bond yields. Watch the two part interview here and here.

In July 2013 I argued the inflationary boom seen in emerging market economies in 2009/10/11 had begun to unwind and will extend for the next three to six months. Now it looks like it might continue for a bit longer. Watch that interview here.

A week later in a panel discussion on the MPC decision of July 2013, I said that the SARB may certainly consider hiking interest rates in coming months, “and if that’s accompanied by a weaker rand that potentially goes to levels of 11.00 or slightly above, we’ve been holding the view that that is a potentiality, that there is a risk that the SARB is forced into a short-term rate hike cycle, but that we may in a year’s time be back at levels where we are today, so it would really be a very short-term hiking cycle.” Elize Kruger, economist from KADD capital disagreed with me, and so did Ettienne le Roux, chief economist of RMB.

The risk of not hiking rates at this stage, I said is that: “Well, we risk starting to lap those other emerging market economies [who are hiking rates] in the currency wars, in the race to the bottom essentially. We run the risk that we’re not able to attract enough capital inflows into SA and that the rand as a result weakens a lot more than we currently anticipate.” The R/$ exchange rate was at 9.80 then.

Watch part 1 of the interview here.

Right off the bat in part 2 after the MPC announced it was leaving rates unchanged, I said that the unchanged decision “in this current environment where we’re seeing capital outflows from emerging market economies, it puts the rand at substantial risk here, and same for bond markets.”

You’ll also note in response to my comment that we need higher rates in SA to ensure the current account deficit remains financed, and in response to this (referring specifically to equities) Ettienne says “hiking interest rates in an economy that’s still weak could weigh on company earnings that then results in equity outflows.” I responded to say that is exactly my point, that the SARB has backed itself into a corner where it can’t cut or hike rates right now, but that as we work through this phase of the business cycle, the SARB may be forced to hike rates to prevent the currency spiraling out of control. That’s where we are right now of course.

There’s more to the interview, and you can watch part 2 here

This is all I have time for right now, but I know my team at ETM Analytics said it many more times in other interviews. Bottom line, if the SARB doesn’t hike today, watch out from above because the rand is going to fall like an anvil.

PS. Russell Lamberti will be on SABC news to discuss today’s rate decision at 3pm, I’ll be on eNCA news at 4pm, and Rob Price will be on BusinessDayTV at 6pm if you want to hear ETM’s take on today’s decision.