Does the South African Reserve Bank (SARB) Respond to Oil Price Movements? Historical Evidence from the Frequency Domain

This paper conducts an empirical analysis to establish whether a causal relationship exists between oil prices and interest rate in South Africa. We employ a causality testing procedure in the frequency domain to analyse the relationship between these two variables. We use monthly data on the Western Texas Intermediate crude oil spot price and the South African 91 days Treasury bill rate covering the time period 1936:1 to 2013:11. We also make use of the standard time domain Granger causality test in order to draw comparison between the two tests. Results show that the time domain Granger causality test fails to reject the null hypothesis for the full-sample, although the tests trongly rejects the null hypothesis for the 3rd sub-sample (1998:12-2013:11), following structural break tests. The results for the frequency domain causality test are different in that for both of these samples the null hypothesis is rejected at certain frequencies; at higher frequencies (between 2.15 and 2.45) for the full sample and at lower frequencies (between 0 and 1.85) for the 3rd sample. In light of this, the importance of the frequency domain causality is noted as it is able to detect causality at certain cycle lengths even when the time domain causality might fail to pick it up. More importantly, with the majority of the 3rd sub-sample period coinciding with inflation targeting regime, our results highlights that the South African Reserve Bank seems to have systematically responded to oil price shocks, especially over the inflation targeting period of 2000:2 and onwards.