Johannesburg, 28 Apr 2004
Over the course of the last month there has been a dramatic shift in expectations for global interest rates. Calls for further cuts in the ECB`s key interest rate have become increasingly muted, and with remarkable data coming out of the US in terms of non-farm payrolls and inflation, the talk is now turning towards not "if" there will be any rate increases this year, but when these rate increases will occur.
Any rate increase will mark a turning point in the global economic cycle with the UK being the only large economy which has raised rates since 2000; indeed, the last time the US raised rates was four years ago, in May 2000. Therefore the departure from the decreasing or low interest rate cycle of the last four years will be a significant shift for the global economic landscape.
While this shift will mean significant changes in the G7 economies, it may potentially be an even more significant period for the South African economy.
Over the course of the last two years the Reserve Bank has reduced interest rates to record lows; this has been facilitated by two major factors. Firstly, a benign domestic inflation rate due to the remarkable performance of the rand; with the devaluation of the rand in late 2001 there were some significant inflation shocks to the system due to the imported component of this number.
Subsequently, the rand has only strengthened, which has restrained imported inflation, leading to an overall lower inflation figure. Secondly, global inflation has been very favourable, or indeed non-existent, which has led to the very low and stable international rates, again providing the opportunity for the SARB to reduce rates dramatically to a level more frequently associated with international economies.
So what now, as we enter a period of increasing global interest rates. While it has not been explicitly stated by the SARB, it has been extremely difficult for the SARB to manage the interest rate, currency and economic cycle of SA, when these were running counter-cyclical to the major global economies. In times where the global economies were raising rates, SA was reducing them and vice versa. This led to extreme differentials between the relative rates and economies and hence had dramatic effects on the South African economy.
After decades of artificial distortions, with the dramatic cuts we saw last year by the SARB, SA now has the opportunity to join the global economic cycle. Rates are at such low rates relative to the average domestic rates of the last few decades, that any increase in the major international rates can be matched by increases of similar magnitudes by the SARB without having any major detrimental effects on the South African economy. These increases do not need to be of the same size as the cuts we have seen recently; rates increases in the region of 0.25% to 0.5% at a time can be expected; in line with global norms, and indeed rate increases of no more than 2% to 3% can be expected in an overall rate increasing cycle.
If the South African economy can demonstrate continued or indeed accelerated growth and weather these relatively minor rate increases through the course of the next couple of years, then this will indicate a remarkable turnaround in the economy of SA. The South African economic cycle will be in lock-step with the global cycle, with the result that the extreme interest rate differentials that we have seen between SA and the rest of the world will be confined to history and South African economic cycles will be in line with global economic cycles. Past extreme cyclical economic volatility will be a thing of the past and a resultant stable economic environment, with all the positive elements for growth which this will entail, will prevail.
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