Month: June 2011

Eskom: Surprise, Surprise – Eskom is awash with cash

A Business Day leader (29 June) referring to the more than doubling of Eskom’s reported profits in 2010-11 to R8.5bn raised the question of whether the electricity utility should have been granted the large increases it was.

Reference in this regard might have been better made to the cash flow generated by Eskom’s operations. These amounted to the very substantial flow of R28.3bn, representing an increase of R12.3bn or 77% from the year before.

However the net cash flow generated for the company was reduced to R22.3bn, after accounting for the cash lost through so called embedded derivatives (that is the cash cost of meeting Eskom’s contractual obligations to the aluminium smelters) and cash lost and gained from Eskom’s considerable trading activity in financial assets and liabilities, that is in its own debt. The equivalent net cash flow number the year before was a mere R9.1bn, making for an even larger percentage increase of 245% in internally generated cash flow in 2010-2011.

Most impressive of all in pure financial terms is that this R22bn went a long way, more than half the way, to funding the very large R44.3bn of capital expenditure incurred in 2010-2011. In other words, current consumers are now financing more than half of the very large capital expenditure being incurred by Eskom to meet future demands for electricity (for which future consumers will be expected to pay an appropriate price). Next year, after a further 25% increase in its regulated tariff, the revenues and cash flows and the contribution of internal funding can be expected to increase by similar large proportions and amounts.

These financial outcomes should not have come as a surprise to anyone familiar with Eskom’s established generating and distribution capacity.

Once Eskom ran out of its excess supplies of generating capacity and new capacity had to be installed, it became essential to adjust tariffs from those based on historical costs to charges based on the returns required to justify the essential investment in additional generating and distribution capacity. This would inevitably mean large increases in revenue produced by the established power stations for as long as they remain economically viable (that is can cover their direct operational costs) and so in the accounting profits and cash flows delivered by Eskom.

Power plants, once constructed, can be expected to have very long economic lives as Eskom’s history confirms. We have argued that the right price to charge current consumers for electricity today is the tariff that would provide the owners of Eskom (the RSA government) with an appropriate risk adjusted return on capital. We have judged this to be about 2% p.a. above the government’s own cost of raising long term capital, as represented by the yield on long term RSA bonds. That is to say, an extra return of about 2% pa over the cost of borrowing, given the low risk nature of an electric utility Eskom with monopoly powers, would seem the right price.

We also argued that the issue of the right tariff and the appropriateness of the real investment decisions to be made in additional electricity capacity should not be confused with how the additional capacity should best be funded (that is, with debt or equity capital). We argued that the SA government should either provide the capital in the form of an infusion of equity capital or by guaranteeing the debts of its wholly owned subsidiary – so reducing the funding costs to its potential minimum. We also indicated that a low risk business like an electricity utility could be expected to fund most of its expansion with debt rather than equity capital. We argued that it would be poor economics and unhelpful economic policy to overcharge, that is to tax current consumers for electricity, to finance the expansion of Eskom. Current and future consumers could be expected to pay the right price for electricity. That is, enough to provide an appropriate return on capital: no more or no less.

When we simulated the operational costs of a new power station of the scale planned by Eskom with a required return of 10% pa, we came up with a tariff to be charged today of the order of the 40c per Kilowatt Hour currently being charged. Our own sense is that inflation adjusting this tariff over the foreseeable future would be sufficient to the purpose of recovering the full cost of generating and distributing electricity in SA. We would be inclined to agree that a further 25% increase in the tariff would be a step too far. Economic growth would benefit greatly from competitively priced electricity in SA.

We would also recommend that Eskom maintains an appropriately high debt to equity ratio of the order of 90% debt and 10% equity. Further, to maintain this recommended debt to equity ratio, current tax payers could benefit from their profitable stake in Eskom through a substantial flow of dividends and tax payments. This year, despite its much improved finances, Eskom is not paying a dividend nor is it paying much by way of actual taxes. The income tax reported in its accounts is an impressive R3.3bn. The actual cash tax paid reported in its cash flow statement is a mere R151m and even less than the cash tax of R210m paid the year before.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View: Daily View 30 June: Eskom: Surprise, Surprise – Eskom is awash with cash

The economy: Steady as it goes

The Reserve Bank Quarterly Bulletin published yesterday has provided further detail on the highly satisfactory performance of the SA economy in the first quarter. Household spending growth has led the economic recovery and was sustained in the quarter at an above 5% rate. Government consumption spending also grew strongly.

The weakest spot in the economy remained the reluctance of the private sector to add to its plant and equipment. However the consistent run down in inventories had come to a natural end in the fourth quarter of 2010 and a sharp buildup in inventories, from highly depressed levels relative to output saw Gross Domestic Expenditure (GDE) rise by over 8% at an annual rate, much faster than Gross Domestic Output (GDP) that as was previously announced grew by 4.8% in the quarter.

If one is to draw a bottom line on the update provided by the Reserve Bank, it is that the economy is growing satisfactorily enough led by household and government spending. However if these growth rates are to be sustained and improved, as must be the objective of policy, the economy needs a stronger commitment by business to additional capital expenditure and to the provision of more employment. More formal employment would help the housing market and highly depressed construction of housing activity that is labour intensive. A business friendly approach by government and its agencies seems to be an essential and urgent requirement for economic and employment growth.

The almost stagnant money and credit numbers indicate very clearly the lack of demand for plant and equipment and for new homes. They also confirm that the economy is not yet operating at what might be regarded as its growth potential. The balance of trade, including the weakness in demand for imports, also confirms that the economy could be growing faster (given easy access to foreign capital on favourable terms). There is moreover little indication that the economy is picking up momentum.

The concern rather, given recent trends, must be that the economy could easily lose momentum (depending in part on the uncertain state of the global economy and demands for exports). The fragility of business confidence could be another negative influence. The best monetary policy could do in the circumstances, would be leave interest rates well alone and unchanged.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View:Daily View: The economy: Steady as it goes

The rand: Remarkably unaffected by global risk aversion

The benchmark Emerging Equity Index lost a further 2.2% last week in response to the uncertainties associated with the ongoing Greek debt saga. The New York indexes held their ground as the news about the state of the US economy improved marginally.

The SA component of this index, the MSCI SA, as may be noticed, did better than the average emerging market thanks to a rand that held up very well in the circumstances of the increased risks being priced into global markets. Both the volatility priced into options on the S&P 500, the VIX index and the emerging market bond spread reflected the lesser appetite for risk late last week.

The trade weighted value of the rand last week was only fractionally weaker by the weekend which in the circumstances of elevated global risk must be regarded as a surprisingly good outcome. The rand/US dollar exchange rate can be very well explained by the emerging market equity index and on this basis the rand can be regarded as very marginally overvalued, to the order of about 3.5%. In the figure below we show the results of this model that predicts the value of the rand/US dollar using the MSCI Index as its only explanation. The fit of this model using daily data since early 2009 has been exceptionally good, as may be seen.

It seems to us that the equity markets are well supported by undemanding valuations relative to earnings and dividends. The fixed interest markets continue to offer very little competition for savings and seem unlikely to do so within the next 12 months. It seems to us also that despite the crisis in Europe, the outlook for the global economy, US weakness taken into account, remains satisfactory enough to make further good growth in earnings from globally focused companies a very likely reality. Currently lower oil prices will help materially to this end.

The future of the euro, or rather, the continued participation of Greece in the Eurozone remains uncertain. How far the German and French leaders are prepared to go to avoid what appears unthinkable to them, and that is a breakup of the euro, and how much help they will be getting from the Greeks to this ideological end, remains unresolved. The likelihood of Europe (that is, Northern European taxpayers) footing ever more of the bill for European unity seems to us somewhat more, rather than less, likely post this weekend’s deliberations. The equity markets would surely like confirmation of their willingness to pay the price for the failure to date of Europe to co-ordinate fiscal and monetary policy. It is a failure that will have to be addressed with or without the active commitment of Greece

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View:
Daily View 20 June: The rand: Remarkably unaffected by global risk aversion

Bonds and property: The case for the defence

The past two weeks have been difficult ones for equity investors on the JSE. RSA Bonds, represented by the All Bond Index (ALBI) have however proved highly defensive. Recently listed property on the JSE has proved even more defensive against underperforming equities. As we show below the value of property this turbulent quarter has performed in line with bonds and significantly outperformed bonds in May and June to date.

The JSE Property Loan Stock (PLS) index has long proved to be significantly more sensitive to long term interest rates than to the equity market. Over the past three years every one percent move in the bond market has seen the PLS Index increase or decrease by about 1.6%. Every one per cent move in the JSE Top 40 Index has seen the PLS move on average by less than one half a per cent (0.5%) over the same period.

The recent strength in the bond market has been very helpful for the PLS index, as could have been expected on the basis of recent past performance. But forces fundamental to the property loan stock companies listed on the JSE have perhaps also been as helpful to property valuations. The dividends per share distributed by the PLS companies since the global financial crisis of 2008 compare more than well with the dividends per share paid by JSE listed companies generally. As we also show these dividends continue to keep pace with inflation.

And so holders of the PLS Index since 2008 have realised an initial dividend yield in line with that of long term interest rates, with inflation linked growth in dividends paid. An inflation protected yield of between seven and eight per cent is highly attractive and has been highly protective of the value of PLS stocks. Were investors confident that such inflation linked or beating distributions could continue, the initial yield on PLS stocks could be expected to fall significantly and the value of PLS stocks be expected to rise.

The week that was: US equity and corporate debt markets continue to diverge

It was another poor week for equities with the S&P 500 off by over 2% while emerging markets and the JSE were not spared the more bearish sentiment.

Metal and commodity prices however ended the week largely unaffected by the sense that the global economy was slowing down. Metal prices are still well ahead of year ago levels. The IMF updated its outlook for the global economy last week and left its forecasts very much as they were. Faster growth in Europe is making up for softness in the US. This should be consoling to those inclined to believe that the soft patch in US data releases are more than a temporary pause. The oil price as always will play an important role in the months to come in determining the spending power and state of mind of the US consumer. A modest pullback in US gasoline prices, while other commodity prices retain current levels, would be very helpful for the US consumer and the market mood.

Unless US earnings and dividends actually disappoint – index earnings are currently about US$81 per share and are expected to breach the US$100 level by year end 2011 – the US share market now offers even more value than it did a month ago with a prospective PE multiple of less than 13 times. Any threat to valuations from higher interest rates seems to have been put off for longer and the spreads over US Treasuries offered by investment grade and high yield corporate borrowers in the US barely budged last week. Despite very heavy issuance of new corporate debt and despite the thought that the US economy may be slowing down, high levels of confidence in the strength of US corporate balance sheets has been maintained. The performance of the US economy and the equity markets will depend on confidence: US business leaders have to deploy their strong balance sheets. Washington DC could help by dealing effectively with its fiscal deficits.

Industrial and employment policy: A new dawn or a false dawn?

The long awaited subsidy for Job Creation has become a reality. The Jobs Fund will make available R9bn over the next three
years as a subsidy for jobs to be created and encouraged with R2bn available this financial year. The fund will be administered by
the Development Bank (DBSA). It will be “…targeted at established companies with a good track record and plans to expand
existing programmes or pilot innovative approaches to employment creation, with a special focus on opportunities for young
people..” (Q&A, Media Briefing, Houses of Parliament, 7 June 2011).

The four areas of focus are Enterprise Development, Infrastructure Investment, Support for Work Seekers and Institutional
Capacity Building, including internship and mentorship programmes. The focus seems broad enough to cover almost any aspect
of business activity.

The approved programmes will be “..cost and risk shared by participants..to ensure real ownership..” In other words, private sector
participants will have to provide matching funds on a 1 to 1 ratio. A reduced own contribution is intended for “non-private sector
applicants” These would include municipalities and public enterprises. It may presumably include NGOs and their like. Applications
must be made by 31 July for funding this year.

The scheme will clearly be employment creating among the ranks of the consultants. It should prove particularly welcome to firms
with well established training programmes. “Support for Work Seekers; assistance with job search, mobilisation and enhancement
of training activities, support for career guidance and placement services” (Media briefing) will surely prove a boon to the well
established and much maligned labour brokers. The statement above reads like an accurate description of their business model.
The SA government is trading off a significant proportion of its corporate tax base for new industrial projects and subsidies for
employment. In addition to the R9bn Jobs Fund the newly defined s12i Tax incentives are backed by a 2011-12 Budget allocation
of R20bn. These are by no means trivial amounts in absolute terms, or relative to all the tax collected from SA companies. It would
be of interest to know the proportion of company taxes paid by manufacturers. Would it be as much as R20bn allocated in the
2011-2012 Budget?

In the 2010-11 Budget estimated revenue from companies was R150bn or 24% of all estimated tax revenues of R643bn. The SA
government’s dependence on income from companies is unusually large. In many other tax regimes the corporate tax rate may be
comparable to the rates levied on company profits in South Africa. But when taxes actually paid are reduced by investment and
many other allowances provided by government to stimulate investment and job creation, the effective (economic) tax rate
becomes much lower than the nominal company tax rate.

SA is following this route. More subsidy and allowances provided for companies, in one way and another, tax concessions and job
subsidies included, that lead to less tax paid and a lower effective tax on business profits. No doubt these lower taxes paid will be
very welcome to businesses that are able to engage skilfully with the system.

If however the path of government spending is to remain unaffected, as would appear likely, the taxes saved or the subsidies
provided to the companies that benefit, would have to be made up by taxes collected from other taxpayers. This must mean
increased taxes on consumption expenditure or on individual incomes; or companies outside the sectors favoured by industrial
policy will be forced to pay up for the benefits provided to industry.

The SA government clearly thinks, as do governments almost everywhere, that it can do better than simply providing an
encouraging tax and regulation environment for business in general. It clearly believes it can pick the winners in the industrial
space rather than leaving the investment and employment decisions to participants in the market place on a field levelled by
equally generous tax treatment, irrespective of the designated activity and location in which it takes place.

It would promote economic growth in SA if more generous investment or depreciation allowances were offered to business in
general rather than those judged particularly worthy by the bureaucrats involved. This would encourage companies to save and
invest more of their after tax earnings or cash flow. Investment allowances reduce the taxable income of companies, leading to
less tax paid and more cash retained and invested. This would lead in turn to more output and employment. But this is an
argument for lower business taxes in general rather than for particular benefits or subsidies.

One has to question the ability of the government through the Department of Trade and Industry (DTI) or any other of its agencies,
the Development Bank or the IDC, to pick the winners, without fear or favour, among the many proposals that are bound to be
made to it. As indicated there will be a great deal of taxpayer’s money at stake.

The government has proved itself much more capable of raising tax revenues than spending them effectively. The subsidies or tax
concessions will surely add to industrial output and employment. But we will never know how much better the economy might have
done and the employment created had much less discretion been exercised over tax concessions or subsidies. As the saying goes if you want more of something subsidise it, if you want less tax it. SA is doing both – extracting more tax from some
employers, employees and consumers, while subsidising other businesses and their employment decisions more generously.

The government through the DTI (and organs like the competition authorities) seems to show a marked and regrettable lack of
respect for the creative powers of private businesses. The simple recipe for economic growth is one that relies on businesses
directed by their owners and senior managers, to pursue their self interest, constrained essentially by the competition provided by
other businesses for their customers, workers and providers of capital. Economic history has surely proved that the recipe works.
But governing best by governing least does not serve the interest of ambitious policy makers. There is a constant flow of new
regulations and intrusions that SA business has to manage which adds to their costs and reduces their competitiveness with
imported goods. There moreover appears no popular ground swell of support for activist economic policies. The impetus seems to
come directly from officials and their consultants.

The poor protest about the lack of delivery of basic services by government not about the lack of delivery of basic goods and
services by businesses. SA Business, unlike the SA government, delivers very effectively. It would deliver more jobs if the labour
market were less heavily regulated to encourage them to do so.

Industrial policy and the Job Fund have become an expensive and counterproductive alternative to sensible, employment growth
encouraging, de-regulation of the labour market. The intervention by the competition authorities in the employment and
procurement decisions to be made by Massmart and Wal-Mart provide an obvious case in point and a further example of
government officials thinking they know better how business should be run in the interest of more employment. The goods and
services market has been made less competitive to make up for the lack of competition in the labour market. The employment
problem is one of the government’s own making, acting as it has done to entrench the rights of established workers, at the
expense of potential entrants to the ranks of the formally employed.

The government and its officials will no doubt point to the jobs gained through subsidy and perhaps also compulsion to employ
more labour demanded of the government departments themselves and publicly owned enterprises. The jobs lost because of
higher taxes and job destroying regulation will be much less obvious and ignored to the great disadvantage of the poor in SA who
need jobs – not handouts to lift them out of poverty.

The solution to the failures of the SA economy, or rather its formal businesses to provide jobs would seem obvious to all but those
with an interest in the status quo – the trade unions and the officials who write and implement interventions in the labour and other
markets of the economy. This is to rely less on government and its regulatory, taxing and subsidy powers and more on private
business to deliver more of the essential goods and services demanded in a modern economy.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View: Daily View 8 June: Industrial and employment policy: A new dawn or a false dawn?

Global markets and the rand: Not all bad news

The flow of disappointing US economic data continued with the Payroll report of Friday that reported a gain of 54 000 in May, well below the monthly average gain in 2011 of 182 000, and an increase in the unemployment rate from 9% to 9.1%. The unemployment rate was not all bad news as, according to the US Survey of households, an extra 272 000 workers joined the labour force only partly offset by a 105 000 increase in household employment.

More people entered the labour force, presumably because they thought they could realistically find work, but not all did so. Hourly earnings in the US are rising very slowly, by 0.1% in April and 0.3% in May. With little growth in wages, any perceived inflationary threat from the labour market has dissipated, providing further reason for postponing higher interest rates and hence the weaker US dollar.

Not all the recent news about the US economy was bad, The ISM non-manufacturing index that covers 90% of the US economy rose from 52.8 to 54.6, marginally ahead of consensus. Numbers above 50 indicate growth. More encouraging was that the employment component of this Index rose from 51.9 to 54, consistent with payroll growth of 175 000, and faster than that indicated by the official payroll report.

The weaker numbers and their implications for low interest rates for longer weakened the dollar and strengthened the euro and emerging market currencies, including the rand. This made the week a better one for US dollar investors on the JSE and emerging markets generally than it was for investors in the S&P 500, that after an extended period of outperformance lost ground to emerging markets last week.

The rand during the week had turned out to be a particularly strong emerging market currency. The rand made gains not only against the US dollar, the euro and the Aussie dollar but also gained about 3% against our basket of other emerging market currencies.

It would appear that the rand had gained from the approval of the Competition Tribunal of the Wal-Mart / Massmart deal after having weakened relative to the Aussie dollar and other emerging markets in the weeks leading up to the decision. SA specific risks, that is policies more or less friendly to foreign investment, would appear to have a modest influence on the exchange value of the rand in recent weeks. The more important influence on the rand will remain those emanating from global markets in the form of commodity prices and flows into emerging market bonds and equities.

The news from the commodity markets was not unsatisfactory as prices held up, helped by the weaker US dollar. The oil price in US dollars was largely unchanged.

The stronger rand and the more uncertain outlook for the US and global economy weakens further the case for higher interest rates in SA. This has been partly recognised in the bond market with a downward shift of the term structure of interest rates. The probability of an increase in the repo rate this year receded the week before last but remained largely unaffected by the news last week.

The US equity markets are undemandingly valued relative to earnings and interest rates and have become less so this past week. The weaker data disturbs the outlook for future earnings as the performance of the S&P 500 this past week made perfectly clear. The key to the outlook for the US economy and the equity markets will be the willingness of US business to put their strong balance sheets to work hiring workers and buying equipment.

The confidence of US business would be greatly assisted by the belief that Washington will deal effectively with the US Budget and US government debt. Any sense that China is loosening rather than tightening its monetary stance will be very helpful too.

To view the graphs and tables referred to in the article, see Daily Ideas in the Daily View: Daily View – June 6: Global markets and the rand: Not all bad news

Vehicle sales: Not much vroom

Naamsa released its new units sold statistics for May 2011 yesterday. The numbers are not encouraging. April 2011 was a poor month for sales, especially when compared to sales in March 2011, and the fall off in monthly sales, when seasonally adjusted, continued in May as we show below.

The sales quarter to quarter and seasonally adjusted have fallen sharply from a very strong March 2011 as we also show. The growth in sales is now barely positive, compared to a year ago, which is a long time in the motor dealing business, and in fact negative on a three month moving quarterly basis as may also be seen.

Making the seasonal adjustment for two months with an unusual number of public holidays, including the Easter holidays that fell in April, has no doubt complicated the analysis of the underlying cyclical trend. Holidays are good for shopping malls but not vehicle show rooms. Also adding complexity are disruptions in the supply chains that start North of Tokyo. Is it a relative lack of demand or an inability to supply that is holding back sales? The Naamsa explanation quoted below appears to attach some (though not major) importance to negative supply side forces.

“..During May, 2011 – constraints on the availability of components from Japan impacted on the production of certain product lines in South Africa and, together with shortages of various models sourced from Japan, this would have contributed to the slow down in the rate of growth in the new car and light commercial vehicle sales cycle for the month. These factors would also have contributed to lower aggregate industry exports. It was anticipated that the supply position would normalize over the medium term..”

Our own interpretation is that the peak of the vehicle cycle has been reached and the growth trend is now a significantly lower one. The market for new vehicles seems to be stabilising at a monthly pace of approximately 47 000 new units sold, well below the heady pace of 60 000 units sold at the peak of the previous motor vehicle cycle of early 2007. That is to say, year on year growth in December 2011 on December 2010 will be about 5%.

The current and projected level of vehicle sales help confirm our impression of an SA economy that is growing satisfactorily, but that the growth is not accelerating. There would appear to be no danger of excess demand materialising any time soon.

The economy, on the basis of these May vehicle sales and the April credit, money supply and house price data, appears to be taking longer to reach its growth potential than previously thought. Moreover the risks have increased recently that the global economy will not support export volumes and prices strongly enough to help take up the slack in domestic demand over potential supply. The danger of a global slowdown has risen in response to signs of slowing rather than accelerating growth in the US. The case for higher interest rates in SA, in the light of domestic vehicle sales and exports of vehicles, has weakened further.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Daily View 3 June: Vehicle sales: Not much vroom

Credit and housing markets: Still no case for higher rates

The credit and money supply numbers for April 2011 indicate that the pace of money supply and credit growth, especially growth in mortgages, pedestrian before, is slowing down gradually, rather than accelerating. The growth trends in M3, the broadest definition of the money supply including almost all deposits issued by the banks, is most clearly pointing lower.

It is demands for bank credit that lead the money supply process in SA. As the banks lend more, the Reserve Bank accommodates the banks with additional cash- that is cash reserves – at the prevailing repo rate. More credit demanded leading to more money supplied is the modus operandi of the SA Reserve Bank. The demands for credit lead the supply of cash and more broadly defined money. A large proportion of SA bank lending is on mortgage and mortgage demands remain especially tepid as we also show below.

Growth in mortgage lending follows house price inflation, as we show below, where it may be seen that the price of the average home is now unchanged compared with a year ago. A housing boom leads to a credit boom and rapid growth in the money supply as it did between 2003 and 2008 – and when the housing boom slows down, so does money supply growth as it has recently. Interest rate settings have proved incapable of effectively moderating the credit and money supply cycles in SA.

Until the housing market picks up the growth in bank lending will remain subdued. The recovery in the housing market has lagged behind the recovery in the economy. It will take further growth in formal sector employment to revive the housing market.

Lower interest rates on mortgage loans, applied much earlier in the slow down, might have helped moderate the contraction in the credit and money cycles, but these now appear most unlikely given the recent uptick in inflation. The credit and money supply numbers should however help dissuade the Reserve Bank from raising interest rates.

There is clearly no money or credit supply growth reason for raising interest rates, nor any excess demands for houses or anything else that would need to be restrained by higher interest rates. Indeed the opposite, lower rates, would still appear appropriate, given the state of the economy and in particular the state of the housing market and the construction industry that is an important employer of labour.

We show below the recent collapse in the cycle of buildings completed. We show how building plans passed have led the building industry lower. The indication is that he planning cycle has at best bottomed out, offering only the hope that construction activity will soon also bottom out and recover.

It is of interest to note that house prices lead not only mortgage demands but also building plans passed. It takes higher house prices to encourage construction activity.

The weak state of the credit and housing markets, that are inextricably bound together, makes the case for lower rather than higher interest rates. The Reserve Bank appears understandably reluctant to raise interest rates in the circumstances. The currently higher inflation rate is of the supply side, cost push administered price variety over which monetary policy has no influence and if it persists will weaken demand further.

Furthermore, as we have mentioned before, we have found no evidence of second round effects of inflation, that is, more inflation that leads to more inflation expected that leads in turn to more actual inflation. Fighting these feared second round effects have become an argument for higher interest rates, regardless of their negative effect on economic activity. Such arguments should be ignored and the SA public and market place made to understand why.

To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Daily View 1 June: Credit and housing markets: Still no case for higher rates