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We have written a number of times about the South African Reserve Bank (SARB), forecasting of where they see the South African inflation rate going over the medium term.
By and large their forecasts are pretty far off, and the worrying thing about this is the fact that monetary policy in South Africa is set based on these forecasts of inflation by SARB. The forecasts tend to vary wildly from one meeting to the next, so question is whether our monetary policy should be set on such erratic inflation forecasts? |
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So SARB's inflation forecasts are about as wild as SA's politics
The line graph below shows the year on year inflation rate for food for food importers, food producers and food inflation as experienced by consumers. Lastly the red dashed line graph shows the 12 month rolling average of food importers inflation.
The imported food inflation is as measured by the Unit Value Indices (UVI) published by Statistics South Africa (Stats SA), food producers inflation is as measured by Stats SA in the Producer Price Index (PPI) and the food inflation of consumers is as measured by Stats SA in the Consumer Price Index (CPI).
The imported food inflation is as measured by the Unit Value Indices (UVI) published by Statistics South Africa (Stats SA), food producers inflation is as measured by Stats SA in the Producer Price Index (PPI) and the food inflation of consumers is as measured by Stats SA in the Consumer Price Index (CPI).
The black dashed line shows the actual inflation rate per quarter from the start of 2017 up to third quarter of 2018. The red line shows the forecasted levels of inflation up to the last quarter of 2020, as published at SARB MPC November 2018 meeting (the same meeting they raised interest rates by 25 basis). Fast forward two months the the January 2019 MPC meeting and the latest levels of inflation as forecasted by the South African Reserve Bank. The blue line represents the latest inflation forecasts as published by SARB at their MPC meeting last week. And what a difference two months makes.
At their November 2018 meeting their inflation forecast for 2019 average 5.5%, which is pretty close to the upper end of their inflation target of between 3% and 6%. At their January 2019 meeting SARB's forecasted levels of inflation for 2019 is sitting at 4.7%. That is a significant decline in the forecasted rate of inflation for 2019. And 4.7% predicted for 2019 is very close to the inflation target mid point of 4.5%.
So the question is, would SARB MPC have raised interest rates if their November 2018 forecast was closer to their January 2019 forecast? The answer to that is they probably would not have raised interest rates if the predicted inflation for 2019 at the November 2018 meeting was sitting at levels closer to the forecast of the January 2019 meeting. So one has to wonder how solid and robust and trustworthy are the numbers the MPC base their interest rate decisions on?
If a two month period has such a significant impact on predicted future levels of inflation, one has to wonder if its time to review the processes and systems used by SARB to set South Africa's monetary policy. Sure in forecasting one can be allowed a margin of error, but revising the predicted inflation for a whole year down from 5.5% to 4.7% in a short space of time such as two months is concerning.
Sure massive fuel price declines has contributed to the downwards revision of predicted inflation in South Africa during 2019, but if SARB was not sure about the future movements of crude oil/fuel prices in the short run and its impact on actual and forecasted inflation then surely the more prudent approach would have been to keep rates unchanged and assume a wait and see policy instead of raising interest rates and a few weeks later the inflation predictions come tumbling now. And SARB cant cut rates now as it will affect their credibility and make them look like fools. So they put SA consumers under significant pressure with the last interest rate hike, and it might all have been due to poor forecasting on the side of SARB.
At their November 2018 meeting their inflation forecast for 2019 average 5.5%, which is pretty close to the upper end of their inflation target of between 3% and 6%. At their January 2019 meeting SARB's forecasted levels of inflation for 2019 is sitting at 4.7%. That is a significant decline in the forecasted rate of inflation for 2019. And 4.7% predicted for 2019 is very close to the inflation target mid point of 4.5%.
So the question is, would SARB MPC have raised interest rates if their November 2018 forecast was closer to their January 2019 forecast? The answer to that is they probably would not have raised interest rates if the predicted inflation for 2019 at the November 2018 meeting was sitting at levels closer to the forecast of the January 2019 meeting. So one has to wonder how solid and robust and trustworthy are the numbers the MPC base their interest rate decisions on?
If a two month period has such a significant impact on predicted future levels of inflation, one has to wonder if its time to review the processes and systems used by SARB to set South Africa's monetary policy. Sure in forecasting one can be allowed a margin of error, but revising the predicted inflation for a whole year down from 5.5% to 4.7% in a short space of time such as two months is concerning.
Sure massive fuel price declines has contributed to the downwards revision of predicted inflation in South Africa during 2019, but if SARB was not sure about the future movements of crude oil/fuel prices in the short run and its impact on actual and forecasted inflation then surely the more prudent approach would have been to keep rates unchanged and assume a wait and see policy instead of raising interest rates and a few weeks later the inflation predictions come tumbling now. And SARB cant cut rates now as it will affect their credibility and make them look like fools. So they put SA consumers under significant pressure with the last interest rate hike, and it might all have been due to poor forecasting on the side of SARB.