Banks beg Mboweni to go easy on rate hikes

ON THE eve of another expected hike in interest rates today, financial heavyweights yesterday urged the Reserve Bank to make monetary policy less reactive, saying rising credit costs have spurred the pace of company failures and may lead to job cuts.

At the same time, a key business confidence index (BCI) fell to a three-and-a-half-year low last month, suggesting growth in the economy was slowing as price pressures, fanned mainly by rising global costs for food and fuel, continue to build.

The South African Chamber of Commerce and Industry (SACCI) said its BCI dropped to 95,8 last month from 96,9 in October — its lowest level since February 2004 — with eight of its 13 components having a negative effect.

“SACCI is worried that higher real financing costs are particularly detrimental to small and medium-size business, especially in a slowing economy,” it said.

Investec Securities — the stock-broking arm of SA’s fifth- biggest bank — added its voice yesterday to the chorus of concern over the effect of higher interest rates, which have climbed by 3,5 percentage points since June last year.

“We expect the MPC (monetary policy committee) to raise rates by a further 50 basis points,” Investec Securities strategist Brian Kantor said.
“What we would hope for is a full recognition of the risks to growth as part of a farsighted, rather than a reactive, monetary policy,” he said.

Changes in interest rates take one to two years to make themselves fully felt and many analysts fear that further increases in lending rates could hurt the economy without having much effect on inflation — which has breached its 3%-6% target range for seven consecutive months.
“Monetary policy is pushing on a string,” said Standard Bank group economist Goolam Ballim.
“Its contribution to containing inflation expectations will be proportionally shallower than its tax on prospective economic growth,” he said.

Figures last week showed that economic growth actually quickened to 4,7% in the third quarter of this year from 4,5% in the previous quarter , but a substantial slowdown is anticipated next year in response to subsiding consumer demand, which accounts for about 60% of the economy.
In a separate statement, Credit Guarantee Insurance Corporation warned that financial stress had boosted the pace of business failures to 12,4% so far this year and the rate was likely to double next year, leading to job cuts.

“Liquidations statistics … confirm that financial stress is seriously affecting business entities, and little respite is expected in the short term,” said the group’s chief economist, Luke Doig.
“Invariably, ailing companies are likely to start with retrenchments as a short-term solution, but as financial distress deepens, they will be forced into liquidation.
“As such, we foresee that business failures could rise 25% next year, with a real impact on the livelihoods of thousands.”

Official data show that SA’s employment rate stuck at about 25,5% in the year to March, despite faster growth in the economy.
In October, the government said it would consider a proposal by labour to make monetary policy focus on unemployment as well as inflation targeting.
But both the treasury, which sets the country’s inflation target, and the Reserve Bank, which enforces it, have since said that inflation targeting is here to stay — ruling out any near-term changes to the framework.

“SA may well have reached the point where a combination of higher prices and higher interest rates means that the economy performs below its potential,” Kantor said.
“We see no good reason for exposing the economy to such risks.”
Inflation measured by CPIX rose 7,3% in the year to October — a 4½-year peak — and is widely expected to peak above 8% in the first quarter of next year. This means the Bank may raise interest rates again at its first policy meeting next year.

SACCI said that despite tougher conditions, business had proved resilient in the past. “When sound and consistent economic policy decisions lead the way, business confidence will follow,” it said.

Business Day - 6 December 2007