MICHAEL AVERY: Was the rate hike premature?

Read on its own, the decision by the Reserve Bank to hike rates last week, as expected by the market, is rather uneventful. Move on, nothing to see here, folks. Well, let’s just pause for a moment.

As Raymond Parsons said on my radio show last week, “too many of my fellow economists, especially in the banking sector, are like an Eskimo family in bed. When the Reserve Bank turns, they all turn”.

That’s not to say it was necessarily the wrong decision, given the recent spike in supply side inflation. And as Business Leadership South Africa CEO Busi Mavuso said this week: “Governor Lesetja Kganyago and the monetary policy committee (MPC) acted to defend price stability — the foundation on which businesses plan, invest and create jobs.”

But I recall hosting the South African Reit Conference in February (property dealmakers barely need a whiff of the punch bowl to send their animal spirits swinging into dealmaking pastures) and nostrils were filled with the scent of further cuts, maybe three more of 25 basis points, and talk of “front-foot dealmaking” and a sector ripe for a return to the heydays (I hope they weren’t referring to 2017), so the speed with which the animal spirits have turned warrant deeper reflection.

There is an alternative view in this case, supported by a minor but sufficiently strong minority, which is important for public debate. That it can look at the same data now and believe the first hike in three years was premature, is sufficient reason to raise a sceptical eyebrow.

As Vunani portfolio manager Warwick Lucas pointed out to me, “This is what worried me as much as one was happy to say, OK, let’s go to a 3% inflation target. It’s such an uncertain world. Now [Kganyago] has got to defend it.”

“If we had stayed with the 3%-6% inflation target band, we wouldn’t be having this debate, because at CPI [consumer price index] of 4.4% you’d be well within the range,” Parsons says. “I’m not saying we must go back to it. I’m simply saying there is a lot of artificiality in all this, also because the Reserve Bank has committed itself to 3% in such a high-profile way that it is now on the defensive and the casting vote is only going to go one way.”

There is, of course, a currency argument. The rand has played a crucial role in buffering us from the full force of imported inflation. And while interest rates are a blunt instrument against exogenous shocks, they do matter for the currency and therefore for imported inflation. Perhaps, I suggested to Parsons, the MPC felt it had to lean a little in support of the rand, even if that is not formally its mandate.

Parsons concedes the point, but he argues that the greater failure is one of tone and emphasis.

“I just think the optics are wrong,” he says. “If you look at most other central bank statements, the word ‘unemployment’ does occur. Here, the optics are all wrong. You may say: ‘Well, I can’t do much about it,’ but you might at least recognise that one of the things you are doing is reducing the growth rate and unemployment is at a record level. You want to recognise that, even if you are a central banker.

“Some of the nuances that you get from [former Federal Reserve chair] Jay Powell or the Bank of England seem to be missing here. You’ve got to choose between being nimble or being an inflation nutter.”

There is also a governance wrinkle here. The Bank’s MPC, with five to seven voting members, is small to medium-sized by global standards and still carries a vacancy that has lingered for too long. Academic literature tends to put the ideal committee at seven to nine members, with the case for broader inputs strengthening in periods of economic uncertainty.

Emerging-market central banks often lean heavily on internal officials, as does the Bank. But institutions such as the Bank of England and Bank of Japan draw more deliberately on external expertise. If former Bank economist Johan van den Heever can serve as an independent member of Namibia’s MPC, it is not heresy to ask whether South Africa, as a middle-income economy facing unusually complex trade-offs, should widen the room too.

The Bank’s MPC, with five to seven voting members, is small to medium-sized by global standards and still carries a vacancy that has lingered for too long

Zeda’s real business is depreciation.

“The day that we are out of industrial completely and we’re identified as a capital deployment business will be the biggest achievement for us.”

Zeda CEO Ramasela Ganda’s comments after recent results were made with an air of exasperation. Unbundled from Barloworld in December 2022, Zeda is still trying to persuade the market that it has broken from its industrial roots.

Ganda’s preferred framing is more interesting: Zeda as a capital deployment business.

The interim numbers make the point. Revenue rose 3.2% to R5.5bn. Headline earnings were up 6.1%. Operating profit was broadly flat at R841m, but net debt still fell to R6.24bn despite a 3.1% expansion in the rental fleet. The dividend was lifted 45% to 80c a share. Most importantly, Zeda reported a return on invested capital of 12.3%, ahead of a weighted average cost of capital of 10.8%. That spread is the story, while almost everything else is secondary.

In this business, you do not merely buy cars. You buy future depreciation curves and hope your assumptions survive the reality of the second-hand market.

Which is why the arrival of Chinese and Indian original equipment manufacturers is such a deliciously awkward test. They bring cheaper vehicles, generous specs and longer warranties. For consumers, this is a welcome mugging of the old order, but for fleet operators, it’s more complicated.

Ganda’s sharpest observation was that some of the new Chinese entrants may not only disrupt incumbents, but themselves as well. Too many models, refreshed too often, in too small a market, can vandalise residual values before the used-car market has even found its bearings. In Zeda’s world, trying to price that deprecation curve remains the critical challenge.