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SIMON BROWN: I’m chatting with Chris Harmse of Sequoia Capital. Chris, appreciate the time. December inflation 3.6%, a little up from November and a fair distance from the new 3% target, although that has some wiggle room. Were there some funnies in it, or is this a number to worry about?
CHRIS HARMSE: No, I don’t think so. I think it is temporary, although it is an upside risk. If you look at the data, the main reason was of course, the sharp increase in meat prices – 12 6%. So that’s still an upside risk. It may have a more profound effect in months to come, and the Reserve Bank may feel that it is going to hover between 3.5% and 4%, and not between 3% and 3.5%.
But if you look at the annual rate, Simon, the annual rate is 3.2%, and our economists always say don’t look at one month’s figure, look at all 12 months. That’s 3.3%, and that’s close, very close.
SIMON BROWN: I take your point. We’ve got an MPC [Monetary Policy Committee] meeting next week. Are they going to kick off the year with a quarter percent rate cut? What’s your expectation?
CHRIS HARMSE: I believe so. I believe there are two reasons they should do so, and I hope they have the same interpretation. If you look at the rand/dollar, we did a 95% correlation between the rand/dollar and the precious metal and our 95% confidence level tells us that the rand is on its way to R14.68/dollar at the end of the year. We’re already at R16.25/dollar, and we see it at about R15.65/dollar when they have their next meeting.
Given that, and also given our expectations for the oil price – rather under $60/barrel than above $60/barrel – at least at current levels, you must just remember such a strong rand is going to have a huge effect on the other import prices of food, and also the fact that we don’t see load shedding; we don’t see Eskom using a lot more diesel at this stage. I still believe that the inflation rate is more or less going towards 3.3%, 3.2%.
So I think the Reserve Bank has to bite the bullet now and bring that down. But of course, you must remember the other thing that the Reserve Bank is … maybe for a normal man on the street it’s more important to ……at the difference between the repo rate, the bank overdraft rate and the prime rate.
SIMON BROWN: Yes. That has now suddenly been opened for discussion. I have to say, I was not aware that that 3.5% sort of difference was actually a Reserve Bank mandate. I just thought the banks had picked that number randomly.
If that changes – do you think there’s a chance to change? – does it have a significant impact on consumer debt?
CHRIS HARMSE: Definitely, definitely. Simon, if the repo rate is at 8%, then you get an eight-plus of 3.5%, which will give you … Okay. But if the repo rate comes down to 5%, then a 3.5 percentage point each way is that much more. So the banks are making far more profit. And the reserve Bank helps them in this way to keep it at 3.5%. And I don’t think that is fair. On a 5-6% repo rate, because we got a lower inflation target, they bring that thing down to something like 2%, 2.5%, which will have an enormous [effect].
SIMON BROWN: Absolutely. Because otherwise, to the point, our inflation is coming down, our repo rate comes down. But that 3.5% doesn’t bring the prime sort of into light.
A quick last point. We’ve got an FOMC [Federal Open Market Committee] meeting next week as well. We’ve just had President Trump referring to ‘Jerome Two-Late Powell’. There’s obviously a lot of antagonism there. The sense is that the FOMC is probably not going to cut next week. Is that your view?
CHRIS HARMSE: Yes, unfortunately, it’s my view that they’re not going to cut. The risk is too uncertain at this stage. It is too uncertain. My mind tells me that they should cut. But I think they’re not going to do it.
SIMON BROWN: Yes. They’re going to keep that eye on the data. That’s the data and most particularly the weakening of jobs. But of course inflation’s been ticking higher.
We’ll leave it there. Chris Harmse of Sequoia Capital, I always appreciate the insights.
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