Chill down the spine not as cold this time

For those of us old enough to remember the horror of the 1998 interest-rate hikes, the past three weeks of political upheaval and ratings downgrades have raised the spectre of a sharp rise in rates.

Looking this week at the gyrations on a graph tracking the prime lending rate since the early 1980s made me feel queasy.

But now that the panic over South Africa's junk status has subsided somewhat, it seems a sharp hike in interest rates may not be inevitable. Note the words "sharp hike" - there may still be increases.

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Interest rates currently are relatively low compared to the earliest years of this century and the two-and-a-half decades before. Now the prime lending rate is 10.5% and the Reserve Bank's repo rate is 7%.

So is anything different now from the 1990s that could mean rates won't spike to the same degree as in 1998 - when the prime lending rate shot up to more than 25% - if the currency tanks? Well, yes, quite a few things.

In the 1990s, one of the Reserve Bank's aims was to protect the value of the currency. So, in 1998, in response to the Asian crisis that sparked a massive outflow of capital from the region and other emerging markets, including South Africa, the repo rate was hiked sharply in just a few months. The bank also intervened directly in the foreign-exchange market to protect the rand.

But its efforts mostly failed. According to Ashok Jayantilal Bhundia and Luca Antonio Ricci in the book Post Apartheid South Africa: The First Ten Years, in a chapter, "The rand crises of 1998 and 2001: what have we learnt", from April to August 1998, the rand depreciated 28% in nominal terms against the dollar.

This sparked increases of about 700 basis points in short-term interest rates, share prices fell 40% and GDP contracted quarter on quarter.

As they said: "Leaning against the wind of foreign-exchange markets may be a fruitless and costly exercise."

So, in 2001, when the rand again weakened sharply, the monetary authorities adopted a more hands-off approach. Even though the rand shed 26% against the dollar between end-September and end-December, short-term interest rates remained stable, Bhundia and Ricci said. The result was that share prices rose 28% and economic growth increased. In 2002, rates did rise, but not at the same pace and quantum as in 1998.

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So why did the bank take a different stance? In 2000, the Reserve Bank adopted inflation targeting, and, shortly before that, the monetary policy committee (MPC) was established.

So not only is the bank's mandate now to ensure price stability - and to do this requires the cautious use of interest rates to contain inflation - the MPC means there is a more thorough, deliberate approach to making decisions on whether to hike or lower interest rates.

As the bank says on its website: "Not one central bank has replaced a committee with a single decision-maker", underlining how a committee with diverse viewpoints ensures that there is "likely to be some moderation of extreme positions and policies and more even policy making".

Prior to the MPC, the decision to change the repo rate was at the discretion of the governor, who would make unscheduled announcements taking the market by surprise. Now the MPC meetings - once every two months - and their forward-looking statements give at least some indication where interest rates could be headed.

So, in this fraught political climate, the Reserve Bank is a steady hand amid the mayhem. But now that I have talked myself down from a state of panic, I realise there is a proviso: as an economist would say, on the one hand and then on the other hand.

In its Monetary Policy Review, released this week, the Reserve Bank did say the outlook is "unusually uncertain".

To be frank, those are not the words you want to hear from your central bank.

Enslin-Payne is deputy editor of Business Times