<\/p>\n
You can also listen to this podcast on iono.fm here.<\/p>\n
SIMON BROWN: I\u2019m chatting with Albert Botha, head of fixed income at Ashburton Investments. Albert, appreciate the time again.<\/p>\n
A month ago this conversation would have been just about whether we are going to get ourselves a nice quarter percent cut from the MPC [Monetary Policy Committee]. Of course, things are fundamentally different.<\/p>\n
Before we come to the MPC decision, it\u2019s tough being a central banker. Energy really is the big issue here, and in our case it\u2019s going to be petrol and diesel price increases coming through. Of course energy is not demand driven. It\u2019s a fairly inelastic demand.<\/p>\n
How does the MPC view energy in the inflation mix?<\/p>\n
ALBERT BOTHA: Good morning, Simon, and good morning everyone. Yes, I have to agree. It has to be tough to be a central banker, not just in South Africa but offshore as well, because you\u2019re correct.<\/p>\n
There is very little elasticity of energy demand. I think for now \u2013 and it seems to be the case across the world \u2013 as your previous guest said, there\u2019s a little bit of a wait-and-see approach where a couple of central banks have had meetings so far in March.<\/p>\n
Read\/Listen:
Sarb expected to sit tight as oil spike reshapes inflation outlook
Biden adviser warns Trump risks inflation if he meddles with Fed
Rate cuts: US likely, SA unlikely<\/p>\n
None of them has hiked \u2013 not the European Central Bank, nor the Bank of England, nor the Bank of Japan, nor the Fed. So the issues that we are sitting with, they can unwind almost as quickly as they wound them up. So that\u2019s the first point.<\/p>\n
But the second point is that there are a number of, let\u2019s say, knock-on effects from energy that, even if you get them sorted correctly, are going to linger in the system if this war keeps going too long. Fertiliser and food are probably the biggest of those.<\/p>\n
SIMON BROWN: And that\u2019s just it. It is those second-order effects. The petrol price goes up; that hurts me but hurts the farmer. Shoprite has to move that packet of potatoes from the central warehouse to the store where I buy it. That perhaps is the bigger thing to watch and, as you say, particularly in the food space.<\/p>\n
ALBERT BOTHA: Yes, because if you think about some of the effects if the war [runs] out, let\u2019s say, three or four months from now, and things unwind. Say Iran makes a comeback and you get Iranian oil on the market and you get Venezuelan oil on the market, and you perhaps get some Russian oil in the market \u2013 this is not a base-case scenario, but something that is feasible \u2013 and oil drops to $50\/barrel, suddenly petrol is fine.<\/p>\n
Read: Fuel rationing sets in, some farmers battling supply shortages<\/p>\n
But fertiliser was expensive for three months, not available everywhere for three months, and you had a smaller planting season across many regions of the world \u2013 and you have this structural upside surprise in food a year from now. So why is food expensive?<\/p>\n
Well, it is because for three months last year, the fertiliser wasn\u2019t as widely available or as cheap as you would have liked it to be.<\/p>\n
SIMON BROWN: That\u2019s actually a great point. I hadn\u2019t thought of that. Of course, it\u2019s the food that\u2019s being planted today with the expensive fertiliser that I\u2019m going to be eating six, seven, eight, nine months down the line at that higher price.<\/p>\n
ALBERT BOTHA: Yes. And that affects everything from the food that you plant to the corn that\u2019s fed to chickens, to the feed that\u2019s fed to beef, to the trucks and the various things taking these things to market and back. So food is one of the bigger ones.<\/p>\n
Read\/Listen:
$100 oil risks reigniting food inflation
Fuel crunch from war threatens South African wheat, corn crops<\/p>\n
In South Africa specifically, energy and food are two of your bigger mixes. The fortunate position the central bank in South Africa is in \u2013 because of the conservative stance thus far, because of the success they\u2019ve had in containing the inflation rate \u2013 is they have a degree of respect and credibility in the market, and they don\u2019t have to feel rushed today.<\/p>\n
Read: Sarb errs on the side of caution, holds rates steady<\/p>\n
They can sit back and say, let\u2019s just wait and see how this plays out. Let\u2019s just wait and see how the other central banks around deal with it. We are sitting at 3% inflation. We have hit our first inflation target when we changed our inflation target, and we hit that well.<\/p>\n
So there\u2019s a degree of credibility that they\u2019ve managed to build up, especially since Covid where many other central banks around the world actually lost credibility.<\/p>\n
SIMON BROWN: I think the Fed hasn\u2019t hit their 2% target in, I don\u2019t know, four or five years. We\u2019re there and, as you say, it\u2019s a new target.<\/p>\n
So no rate cut is expected today. A rate hold probably is. And then it\u2019s all going to be about the press conference from the governor and the Q&A, particularly around GDP expectations for inflation and how much they are shifting that. Although, to be clear, to your earlier point we simply don\u2019t know because we don\u2019t know where the war is going to be in a month, never mind at the end of the year.<\/p>\n
ALBERT BOTHA: Yes, you\u2019re entirely correct. We are likely going to see some inflation expectations in the short term. So over the next three to six months we\u2019ll see some rises. We are already starting to see some of that in the numbers, even while the back end of the inflation forecast towards the end of 2027 remains mostly contained.<\/p>\n
Read:
Oil and gas jump as Iran widens energy threat
Here are the airports and airlines disrupted by US-Iran conflict<\/p>\n
So you\u2019re really going to start seeing that. You are very likely going to see a drop in GDP growth expectations. You can imagine the gold price is fallen 20%, oil is up. You\u2019ve got issues with two of your biggest tourist hubs in Qatar and Emirates having less reliable flights. Few people are willing to fly, and we get a significant amount of travel from there as well, and those Gulf regions are where we get a lot of our fertiliser.<\/p>\n
So growth is likely and growth forecasts are likely to be down slightly. Inflation forecasts are likely going to be up \u2013 even if by the end of the forecast cycle towards the end of 2027 forecasts are still contained.<\/p>\n
Then, if the war continues and oil stays at these prices, central banks are going to be in a position they don\u2019t want to be in, which is rising inflation, potentially, and falling growth, which has a term \u2013 it\u2019s called stagflation. It\u2019s the central bankers\u2019 worst nightmare.<\/p>\n
SIMON BROWN: I was hoping you wouldn\u2019t say it, but you did \u2013 stagflation.<\/p>\n
We\u2019ll leave it there. Albert Botha, head of fixed income at Ashburton Investments, I appreciate the early morning time.<\/p>\n
Listen to the full MoneywebNOW podcast every weekday morning here.<\/p>\n
#Energy #prices #reshape #monetary #policy #decisions<\/p>\n","protected":false},"excerpt":{"rendered":"
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