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Is Tito about to get egg in face?

The decision yesterday (16/8) of the SA Reservebank (SARB) to increase interest rates by 0,5 percentage points could be SARB boss Tito Mboweni's first major mistake since taking over the reins as a relative "central bank rookie" a number of years ago.

To increase rates on the very same day the world financial markets rattled, could be described as brave, or foolish, or as "out of touch with the international markets". Time will tell which description sticks.

I think there is a 50% chance Tito will have to reverse his rate increase (which takes effect today) in the coming weeks. If that happened, it would be (and could be) a very embarrassing moment for Tito and the financial managers in the SA government.

One caveat: South Africa has never been one to go "counter-cyclical" with its monetary policy, meaning it has never done the Greenspan thing of lowering rates to avoid a liquidity crunch in the face of instability on the financial markets. Certainly not in the Stals era. Then the "wagwoord" was: Let's use rates to bolster, or at least stabilise our falling exchange rate. Or: Monetary policy should be used to "lean against the wind".

Of course, that might have been an unspoken reason for yesterday's increase - the day on which the rand also took a bit of a beating on the forex markets and dropped below the R10 for 1 Euro level. Chances are the rand will come under more downward pressure in the coming days, so, if you're one who believed the rand was as the right level before (I didn't), then the rate increase came at a good time for you.

Let's hold thumbs for Tito - it certainly won't be nice to go up there and announce a revision of your rate decision shortly after it was made.
17.8.07 09:58



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