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Following The Global Fashion
Dr Cees Bruggemans, Chief Economist First National Bank
21 November 2005
There isn't exactly a consensus as to what will happen to our interest rates in December, except apparently among the two leading economic policymakers.
There have been repeated statements over the past six weeks by SARB Governor Mboweni that CPIX inflation should not be allowed to move outside its target, secondary pass through was likely, and expectations could be impacted by higher energy prices.
Last week the Minister of Finance for the second time publicly supported his SARB colleague, indicating that it is unlikely that we will remain behind the curve.
Whose curve exactly?
Are we closely following international example? For that is how hugging the curve comes over. Not wanting the genie (higher inflation expectations) to get out of the bottle and closely copying overseas analysis, language and example, whether or not our situations are identical.
Diverse opinions locally appear little different from the split observable at the ECB. Those sensing high energy prices leading to secondary pass through eventually and becoming embedded in expectations, if not addressed early; and those that don't share these concerns.
The first bunch of central bankers wants to raise rates soonest, the other bunch wants to wait and see. The first bunch is in the ascendancy and will likely win the argument eventually.
The Fed is more united in wanting to take generous monetary accommodation off the table, because its growth is still strong (4%), with global conditions keeping long yields down everywhere and effectively turbo charging the US economy and its frothy housing market.
Europe has less of this excuse, but with growth picking up to 1.5% it wants to make the same argument. Obviously its potential growth is lower than America's.
Even with the Fed having more of an argument regarding a tightening output gap (and thus inflation pressure down the road) than Europe, an awful lot of these chaps appear convinced events will lead to second round pass through, disturbed expectations and higher embedded inflation.
The growing sentiment is to nail it before it can take hold.
Apparently our leading policymakers have bought this story wholesale, without reference to our stable capital market rates (showing no inflation concern) and our non oil pricing so far undisturbed. In any case, that's historic data. Focus on what is coming these next two years.
Here the new mantra from overseas is very strong. With energy prices having increased strongly, futures prices also high, and the oil market tightness being what it is, there is strong conviction energy prices will be high for some time, rubbing off on other price behaviour if lasting too long.
A spiky oil price won't become embedded. More prolonged elevation of energy prices and overall inflation should eventually shape pricing behaviour generally. Ergo, core non oil inflation will rise, reinforcing higher labour demands, if pre emptive counteraction isn't taken.
This gospel has driven the Fed for some months, though other aspects (a frothy housing market giving consumers a free ride they shouldn't have) probably loading the dice as well.
In Europe the pre emptive mood is far stronger, but then they haven't quite the flexible US markets. We apparently listen to both these serenades, liking what we hear.
Perhaps some foreign central bankers have informally enquired what we think we will be doing next, pointing out the dangers of doing nothing, pushing the new global fashion, and politely enquiring about what went wrong again on a previous occasion back in 2001?
It may all be a little overwhelming, when one has a strongly performing economy, fast rising credit demand, a widening current account deficit, and foreigners muttering uneasily with increasing intensity.
Better join the crowd? Hit it firmly on the head early, hopefully not having to hit it too much thereafter if one can kill any wrong inclinations early, making the whole transition relatively painless? This way one is also nicely positioned to start cutting rates once the growing global inflation hysteria is found out and ends, leading into the next cutting cycle. We can then join with a clear conscience.
A pity perhaps that by raising rates we will brake our growth momentum. After a decade of underperformance we were finally getting somewhere, and now global fashions dictate we freely cut back a notch. It is perhaps not always appreciated that growth momentum doesn't grow on trees. It is very difficult to achieve and should be nurtured, just as much as low inflation expectations.
We don't hear such balanced nuances every day. Instead, we now seem to be growth heroes, capable of turning on and off the growth tap at will, with inflation expectations the far more difficult achievement.
That isn't so. Think about that a bit and be a little less trigger happy just because foreigners with too low interest rates are finally taking their accommodation off the table. Ours isn't quite the same situation.
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