15 hours ago
1
You can also listen to this podcast on iono.fm here.
SIMON BROWN: I’m chatting now with Zain Wilson, a strategist at Old Mutual Investment Group. Zain, appreciate the early morning. The inflation target – we have had it since 2000. I think it’s fair to say it really has worked – the 3-6% band since 2017 and the governor has been on anchoring it at 4.5%. It is higher than our emerging market peers at this point in time.
Read: SA panel to draft inflation-target recommendations
This really is the window we have now with the low inflation. It’s an opportune time to reduce that target – the talk is to 3%, but this really is perhaps our moment to grab it.
ZAIN WILSON: Hi, Simon. Thanks for having me. Yes, 100% correct. I think what you don’t want to do in an environment where growth is very strong and inflation very high is to start switching to a low target. But as we’re already hovering around the 3%, the cost of that transition on the economy would be much lower.
So why not take this opportunity to align with our emerging market peers, and then there are a whole kind of list of tailwinds that come from that. So I 100% agree. This is the ideal time if Treasury and the Sarb can get on the same page.
SIMON BROWN: And that perhaps is the key point. The market was full of the idea that we know that the discussions had been happening between Treasury and Sarb. They’ve been ongoing for a year or more. The expectation has happened. The governor then – I suppose we could say unilaterally, although he did say ‘anchoring’ and not ‘targeting’ – said 3%. Treasury is still officially at 4.5% . It is their call to do it.
I saw reports during the week that perhaps Treasury and the Sarb were making nice. Do we have any indication of whether they’re on the same page and we’re going to get something from Treasury?
Read: Is South Africa’s 3% inflation target feasible?
ZAIN WILSON: I think we’re reading the same report, Simon, so I don’t have any better information than you do. I think the risk of not getting alignment is that your inflation expectations don’t adjust as quickly and that we again kind of lose control of the long end of the yield curve. That’s incredibly important for South African assets and the price we pay for shares in South Africa – the fiscal sustainability at Treasury.
So if there was no alignment and that transition to a low inflation target, even though Sarb kind of pursues a softer transition without the support of Treasury, then rates wouldn’t come down, the long end would stay kind of steep and we’d continue to suffer in this fiscally tight, high interest-rate environment. So I don’t know if they’ll get there.
Read: SA urged to factor climate risk into monetary policy
The indications are that we’re closer to alignment than we were a couple of months ago. The market seems to be responding well to it on the bond market, but the equity market isn’t. So the dynamic between the two, I think, is quite interesting.
SIMON BROWN: You make an interesting point there around the long end. In a recent note you put out you said that the data shows mixed evidence around inflation-targeting improving growth, but clear evidence that it does lower government borrowing costs. Our borrowing costs are giant and that would be a boon for our economy, even if we just get the lower borrowing costs.
ZAIN WILSON: I think it will be a huge boon for the fiscal side. I don’t think it is enough by itself to drive growth and ultimately get growth higher, while bringing interest rates down is what we need to do to move on to a more sustainable fiscal path. So I would read it as more beneficial to bonds themselves.
Domestic bonds continue to look relatively attractive, but that is not enough on its own, even if we get alignment between the Sarb and Treasury to create a regrowth-friendly environment. What’s going to drive that is fiscal reform.
The reform on Transnet is opening up some of the public sector infrastructure to the private sector and, most importantly, getting job growth higher.
SIMON BROWN: Yes, 100%. I take your point. For me, being a policy nerd in a sense, it’s an exciting point in our country’s history to be lowering inflation. To you, what you said a moment ago, it’s not a silver bullet. It is one part of a process but it doesn’t solve our woes, as you say. Transnet, unemployment and all the rest – that is going to be policy.
Another point quickly before we let you go, the inflation process – it really is lower inflation. In part you mentioned it earlier; greasing the wheels around the expectations is also a large amount of it, which is why the governor has spent the last eight years talking around 4.5%.
Expectations are so hugely important. And a low inflation target really feeds into that.
ZAIN WILSON: I would agree. I’d also add to it that it’s slightly different, maybe, in South Africa than it would be if you compare it to maybe the US or more flexible economies where we still have fairly rigid labour markets, and we have a component of inflation that is being driven by administrative prices.
So while the link through inflation expectations is important, the actual transmission and how those adjusted price expectations come during the economy will be slow in South Africa, given our other rigidities. Labour flexibility isn’t what it potentially could be and administrative prices have been driven by electricity and municipal costs and won’t adjust because of a low inflation target.
Read: Chasing 3%: Understanding the inflation target debate
So the path will be gradual. Now is the right time. There are definitely tailwinds but that is not in and of itself going to get South Africa on a better growth path or better fiscal path.
Read: South Africa’s Kganyago presses case for 3% inflation target
SIMON BROWN: It’s an important part of the puzzle, but there’s a much bigger puzzle – and that is at Treasury’s door.
We’ll leave it there. Zane Wilson, strategist at Old Mutual Investment Group, I appreciate the early morning.
Listen to the full MoneywebNOW podcast every weekday morning here.
English (US) ·