Economic Conformity – All 25 Economists in SA say that rates stay on hold today

“It is better to fail conventionally than to succeed unconventionally.” – Keynes

With the South African Reserve bank meeting today to decide on interest rates, all 25 economists surveyed by Bloomberg believe that rates will be kept on hold. While I believe that there is a very strong possibility (80%+ chance) of a rate hike today, the divergence between my view and that of economists is the largest it has ever been. While one can make the case for either leaving rates on hold or hiking them, the fact that economists have not adjusted their forecasts in the face of a dramatic change in circumstances shows them to be very out of touch with reality.

Three major factors point to the probability of a rate hike today:

1) All our emerging market peers (India, Brazil, Turkey, Indonesia) have taken significant action to hike rates in response to rising inflation and weakening currencies. SA has not moved.

2) The SARB has over last 2 meetings given strong indications that they would not hesitate if they saw risks to the inflationary outlook. While inflation has been subdued to date, the depreciation of the currency along with the rise in petrol and maize prices must put the inflation target at risk.

3) Since the last MPC meeting in November 2013 the Rand has depreciated from R10,13/USD to over R11/USD. This is a move of over 10%, as the Rand under performed our EM peers who have been taken steps in adjusting their monetary policy. A volatile Rand brings economic instability and the weakness of the Rand will eventually take its toll on inflation. 

While a rate hike today is by no means dead certain, the lack of diversity among economist’s views shows a remarkable lack of flexibility and courage.

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