Lower inflation an empty win
This year will finally see interest rates fall. But whatever relief the South African Reserve Bank administers, it will have come too late for some
This year will probably be when markets declare victory over inflation, which became the curse of the global economy in the wake of its post-covid recovery. And, while the time to cut interest rates will probably come in the next 12 months, one thing you can bet on is that central bankers won’t be falling all over themselves to proclaim inflation vanquished so long as the mantra “higher for longer” still rings in their ears.
As many hold off to administer relief until they can be sure inflation is truly under control, economies — including our own — will endure significant costs.
And there is still the question of just how much pain central banks will ask us to live with.
In a research note released last week, Investec chief economist Annabel Bishop suggested that South Africa’s annual inflation rate will probably average 4.5% in 2024, barring any surprise weakness in the rand or large market swings.
At the midpoint of the South African Reserve Bank’s target range, a 4.5% average inflation rate is good news, confirming that the country is well on its way towards lower interest rates — currently at their highest level since April 2009.
But most economists, Bishop included, expect this to happen only in the second half of this year when there is some assurance that inflation has truly come unstuck.
This is probably true for a number of economies, but South Africa is something of a special case, given the singular weakness of the country’s currency, a source of stubborn domestic inflation that the Reserve Bank will be keeping an eye on.
Indeed, in the first week of 2024, the rand was among the top declining emerging market currencies against the US dollar — the currency having generally lagged its peers amid local idiosyncrasies such as the deleterious energy and logistics crises. Election-related uncertainty has emerged as another reason to bet against the rand.
The rand will regain strength in the wake of a cut by the United States Federal Reserve, but there is still some uncertainty about when this moment will come.
Inflation’s return in recent years, and central bankers’ chosen remedy for it, has been fiercely debated since prices were ratcheted up in the aftermath of the pandemic. Referring to this debate, famed economist Joseph Stiglitz recently wrote: “Seldom in history do we see such a quick test of alternative theories.”
Stiglitz labels the two sides representing these alternative theories as Team Persistence and Team Transitory. Despite ongoing uncertainty, the latter team — which argued that inflation would be brought down, not by excessive monetary tightening, but as a result of market realignment — seems to have come out on top, according to Stiglitz.
The implication of this apparent Team Transitory win is that central bankers are not to thank for inflation’s decline — and that, instead, we should be questioning them having inflicted so much unnecessary pain in the first place.
Of this era of monetary tightening, during which the US Fed set the pace, Stiglitz writes that central bankers’ unfounded theories have “imposed enormous risks on the global economy”.
“As seems so often the case, it is those at the bottom — both in the US and around the world — who were asked to bear those risks,” he adds.
Stiglitz’s criticism echoes that of many in South Africa who have railed against the Reserve Bank for its dogged approach to bringing inflation to heel.
In November 2023, after the monetary policy committee opted to hold interest rates at their current 14-year highs, the South African Federation of Trade Unions accused the Reserve Bank of having no regard for working-class families.
“This will be welcomed, with [the South African Reserve Bank] praised as both hawkish and thoughtful. However, our criticism remains: a restrictive monetary policy harms growth prospects and hurts the working class more than any other section in the economy,” the labour federation said in a statement.
High interest rates are pernicious — and not just for the reasons we know.
A study out of the Inter-american Development Bank (IDP), which analysed Brazilian credit data, found that high interest rates have the effect of smothering innovation. New businesses are subject to much higher borrowing costs. “What do brilliant, cash-poor entrepreneurs with fledgling companies do in such circumstances? They may have to watch their ideas die,” one of the study’s authors, Cézar Santos, recently wrote.
According to Santos, high interest rates weigh heavily on the growth of firms, employment and ultimately national welfare.
The IDB study suggests that high interest rates leave scars, something an economy like South Africa’s can ill afford.
All this to say that, although 2024 will bring about some relief, it will come about slowly and only after households and small businesses have already suffered immense losses. And in an economy in which pain comes from a number of other sources, recovery will be far from easy — if not impossible.
Central bankers’ theories have ‘imposed enormous risks on the global economy’