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Blog : 25 November 2016 (South African Reserve Bank's inflation forecasts over time and what it means for SA interest rates)
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In today's blog we take a look at South African Reserve Bank (SARB) inflation forecasts over time and the impact their forecasting has on South African interest rates.
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Inflation forecasting
The line graph above shows the various inflation forecasts from SARB at their different MPC meetings.
What is clear from the graphic above is that the medium and longer term inflation forecast has come down considerably during the course of the year. So the question is if the inflation forecast has come down so much, why has SARB not considered cutting rates in order to give consumers and the economy a much needed boost? The impact of their last interest rate hike will still continue to work it's way through the economy.
What is clear from the graphic above is that the medium and longer term inflation forecast has come down considerably during the course of the year. So the question is if the inflation forecast has come down so much, why has SARB not considered cutting rates in order to give consumers and the economy a much needed boost? The impact of their last interest rate hike will still continue to work it's way through the economy.
At the MPC's January 2016 meeting they forecasted that inflation would average 7% in the third quarter of 2016. The actual rate of inflation came in at 6% for the third quarter. Way less than SARB's forecasted. And sadly based on SARB's forecast of where inflation was heading for 2016 they raised the Repo rate by 50 basis points from 6.25% to 6.75% at their January meeting. Then raised it from 6.75% to 7% in their March meeting even though their inflation forecasts in March 2016 (the purple line in the graphic) was substantially lower than their inflation forecast at their January 2016 meeting (the dark blue line).
It is worrying that SARB's forecasts of inflation is so far off the actual figure as this forecast is used as one of the primary inputs at SARB's monetary policy committee meetings. Based on their expectations of inflation interest rates are adjusted accordingly. And their expectations of inflation has been pretty far off with detrimental effects on South African consumers and South Africa's economy.
It looks like SARB's forecasting model has an upward bias as their forecast tends to be higher than what the actual inflation figure turns out to be. This bias will skew interest rates to the upside too.
It continues to be our belief that SARB raised interest rates in January 2016 (just after President Zuma unleashed Nenegate on South Africa) and in March 2016 to protect the Rand more than it did to curb inflation. But SARB cant publicly say that as the Rand is not their mandate, but inflation targeting is their mandate. So under the guise of worrying about "import inflation" due to a weaker currency, the SARB raises interest rates to curb inflation. But what they are actually hoping to do is help the Rand keep it's value so that imported goods do not become more expensive and we start importing inflation due to a weaker exchange rate.
It looks like SARB's forecasting model has an upward bias as their forecast tends to be higher than what the actual inflation figure turns out to be. This bias will skew interest rates to the upside too.
It continues to be our belief that SARB raised interest rates in January 2016 (just after President Zuma unleashed Nenegate on South Africa) and in March 2016 to protect the Rand more than it did to curb inflation. But SARB cant publicly say that as the Rand is not their mandate, but inflation targeting is their mandate. So under the guise of worrying about "import inflation" due to a weaker currency, the SARB raises interest rates to curb inflation. But what they are actually hoping to do is help the Rand keep it's value so that imported goods do not become more expensive and we start importing inflation due to a weaker exchange rate.
And attempts to boost the Rand has failed miserably, as we showed the other day, the Rand is at least 15% undervalued against the US Dollar using real effective exchange rates,while the Big Mac Index is showing that the Rand is around 30% undervalued against the dollar.
If SARB's focus is more to protect the Rand than inflation targeting they should come out and say it, as raising interest rates when upward inflation pressures is based on cost push factors rather than demand pull inflation is unnecessarily punishing consumers for factors beyond their control, such as the recent droughts that caused food prices to increase.
If SARB's focus is more to protect the Rand than inflation targeting they should come out and say it, as raising interest rates when upward inflation pressures is based on cost push factors rather than demand pull inflation is unnecessarily punishing consumers for factors beyond their control, such as the recent droughts that caused food prices to increase.