Only way to avoid stagflation is to increase our interest rates – TreasuryONE’s Andre Cilliers

In the latest episode of the Currency Focus podcast, Bronwyn Nielsen and currency expert Andre Cilliers of TreasuryONE discuss the local unit’s movements. Cilliers says that the central bank’s continuous reluctance to increase interest rates in the name of growth is misinformed. He also mentions possible risks to the rand, including a rising oil price, any negative news out of China (especially to do with Evergrande or the energy crisis), or an announcement by the Federal Reserve on tapering and interest rate movements. “The central bank should just actually get rid of all this quantitative easing that they’ve done. They should actually increase their interest rates to try and curb inflation to avoid stagflation,” he says. – Claire Badenhorst 

Andre Cilliers of TreasuryONE on US job data and the Federal Reserve’s tapering modus operandi:

Those figures are actually quite interesting because if you look at the unemployment figure versus the non-farm payrolls, then the unemployment figure is actually lower but the non-farm payrolls came in at a very much lower figure as well. So a bit contradictory. Hence, the people are expecting the Federal Reserve to continue with their tapering during November, so no change is expected from the Federal Reserve side at all.

On using interest rates to curb inflation and avoid stagflation: 

Well, I think my personal opinion is that the central bank should just actually get rid of all this quantitative easing that they’ve done. They should actually increase their interest rates to try and curb inflation to avoid stagflation. This consistent avoidance of increasing interest rates in the name of growth, I think, is the wrong path to take, and that’s my standpoint. You know that I’ve said many a time that this continuous reluctance to move interest rates higher and this so-called transitory inflation that everybody spoke of – they might find that the inflation applies for political asylum and then stay much longer than was anticipated. I think that’s exactly what’s going to happen. The only way to get rid of that is to actually raise your interest rates. Now, I think that’s one of the reasons why we are seeing that the longer yields in the Americas are actually rising a little bit on the back of last week’s employment figures.

On whether it’s too late: 

I think the horse is on its way to the stable, yes, but I don’t think it’s ever too late. I think there’s always room to manoeuvre and there’s always room to change things. But you need the willingness of people to do that and that’s what we’re missing at this point in time. But I don’t think it’s too late to actually do something to stop and curb any runaway inflation throughout the world.

I sometimes wonder whether our central banks are not afraid of seeing stock markets actually declining quite significantly and losing a lot of value and wiping out and incurring quite a lot of big losses for a lot of people because I think stock markets might be slightly overinflated on the back of the low interest rate scenario that we’ve had for so many years, and I think that’s one of the reasons why these people are so reluctant to change all of that as it might have a very negative impact on stock markets if people start moving out of this overload of stocks into cash markets. You know, so not too late, and I don’t think a correction in the stock market is entirely an incorrect thing to happen.

On the rand remaining in the 15 levels:

I’m still retaining my view and keeping my view firm on that for this year. Going into next year, I think we could see a change and move up above the 15 level again and then move into a R15.20 to R15.70 range quite early in the new year.

On what he makes of the news coming out of the east:

Well, if you look at the gearing of companies and debt in companies in China, then it stands at horrific levels as a percentage of GDP. Not a good thing at all. And then the whole Evergrande thing comes back to, you know, the gearing of companies and on top of that comes an energy crisis where people will have to cut back on manufacturing to get out of that because they will also have the same situation as we do with the negative impact on growth, and that negative impact on growth will compound in terms of the gearing of some of these companies and that will be negative for emerging markets. But then, as I’ve just said a little earlier, that’s why I say that in the beginning of next year, we will see the rand breaching 15 levels and go into the R15.20 to R15.70 range on the back of weaker emerging markets and those concerns coming back to the forefront.

On the impact of the oil price: 

That’s very negative for our economy in terms of the large amount of oil that we import and the impact of that on our fuel prices. Fuel is used in the logistics sector, you know, it’s used throughout the manufacturing sector. So dramatic impact and negative for our inflation rate because that we could see increase and that could bring, from a monetary point of view, an increase in interest rates a little bit closer to being implemented than what is expected. Now the interest rate increase as such would be positive for the rand but longer term, it would be very negative for the economy and in terms of growth. So it would be a small impact on the positive side for the rand at largely a negative impact going forward.

On the impact of the local elections on the rand: 

The closer we get to the first of November, it is my idea if I look at the news media – I look at social media, I look at what’s happening around us – then I say that risk is actually subsiding slightly in terms of breaking to the negative side. I think we can move that ‘negativeness’ that I have seen in that area to a neutral stance at this point in time. So I don’t think that will have too much of an impact on the currency at all. The election results might be interesting afterward but I don’t think that will impact on the currency at all.

On any other potential red flags for the rand:

Locally, nothing really yet. I’m happy with what happens locally in South Africa. It’s the international environment. It’s any announcement by the Federal Reserve on tapering or interest rate movements. And then obviously, as we’ve spoken a little bit earlier about the whole Chinese gearing of companies and the energy crisis situation within China. Any further negative influence on that side will be a negative risk towards the rand. If that stabilises, that will be further positive for the rand.

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