Reserve Bank must ‘read the room’, reverse course on interest rates
The latest increase in the repo rate by 75 bps to an annual rate of 6.25% has again raised questions about the appropriateness and adequacy of interest rates as a tool to curb inflation in SA. The Reserve Bank’s rate increases, aimed at achieving its macroeconomic objectives and guiding borrowing costs, come against a groundswell of concern about the unaffordable cost of living, which is reflected in violent protests.
Last month, the World Bank warned that hikes by central banks may trigger a global recession in 2023. It said central banks had raised rates “with a degree of synchronicity not seen over the past five decades to tackle soaring prices”, raising the risk of recession and a “string of financial crises in the emerging market[s] and developing economies that would do them lasting harm”.
Deplorably, this warning has gone unheeded.
South Africans lament the increases in food prices, which shrink their shopping baskets, while their budgets are also under pressure from rises in the costs of electricity and transport. There are families who can no longer afford to use their credit cards as the monthly repayments are unaffordable. The stories are endless, but equally painful.
The primary mandate of the Reserve Bank is “to protect the value of the currency in the interest of balanced and sustainable economic growth”. Additionally, it has a statutory mandate to enhance and protect financial stability in SA. This is underpinned by Section 224 of the constitution. Thus any change in the mandate will require a constitutional amendment.
The Reserve Bank sets the level of the repo rate — the rate at which it lends money to commercial banks — and interest rates respond to these changes.
This is why the Bank’s rate changes provoke debate on its mandate and its use of inflation targeting to maintain the Consumer Price Index (CPI) within a range of 3%-6%. Some commentators suggest that if the Bank remains resolute on inflationtargeting, it should embrace a dual mandate, which would include the promotion of maximum employment and stable prices.
They argue that the solitary mandate makes the Bank highly restrictive and unaccountable for the high level of unemployment and disheartening economic growth. They say the inflation targeting the Bank uses is an extraneous framework that is ill-suited to SA’s dynamics. They point to the conduct and performance of the Bank as being responsible for calamitous economic woes.
The recent rate increase, the sixth consecutive rise since November 2021 to achieve the inflation target in 2024, has come at a cost. The repo rate has accelerated from 3.5% to almost double at 6.25%. Granted, we are not at the 13.5%
(yet) that we witnessed around September 2002 or the 23.9% seen in June 1998, but the current rates have hit the majority of South Africans hard.
For this reason there are questions about the relevance of the Bank maintaining CPI within its target of 3%-6%, given that the inflationary pressures are mainly exogenous and not an overheating of the economy.
The economy was limping before 2019, partially due to widespread corruption, malfeasance and the collapse of many state-owned enterprises. With the Covid outbreak, the July 2021 unrest, flooding in KwaZulu-Natal in April and widespread electricity blackouts, the economy is now firmly in intensive care.
The impacts of the black swan events and our own-goals are hitting South Africans hard in social and economic terms. If anything, the economy needs a boost, which is difficult to manage when interest rates are high.
So, is it still appropriate for the Bank to remain unyielding on the inflation targeting band and keep hiking interest rates?
In general, higher interest rates are a policy response to rising inflation. But the foremost cause of the prevailing inflation is the Russia-Ukraine conflict and changing supply chains, which are driving fuel, food and other costs.
Practically, the surging interest rates suppress economic growth.
Sociopolitical commentators, including Thabo Mbeki, have warned that SA is facing its own Arab Spring moment. Unless there are interventions to put South Africans to work, especially the youth, anarchy is imminent.
The official unemployment rate of 33.9% (63.9% for those aged 15-24 and 42.1% for ages 25-34) is a recipe for wildfires. Not only is the economy not growing, but the pace of transformation is glacial. We walk in shame with the ignominy of being a leading nation with the most unequal society in the world, and hunger surrounds us. The apocalypse, if not Armageddon, is staring at us at close range.
The Bank ought to act now, given our unique circumstances, by reversing course and starting to lower interest rates. Stimulating demand to boost economic growth should be its aim.
Are the current rates, fuelled by external dynamics, consistent with the Bank’s vision, which is based on maintaining the growth of the South African economy?
There is no denying that fiscal interventions are needed. But monetary policy cannot be left to a few individuals to suppress socioeconomic growth. The Bank’s leadership has a duty to ensure that we still have a country when we wake up. The legitimacy of this esteemed institution depends on the words and actions of leaders who take actions that positively impact the lives of South Africans.
The Reserve Bank’s legitimacy and authority will be lost when leaders remain dogmatic in their approach and fail to “read the room” and apply appropriate steps. Right now, with respect, the room is hot, and leaders seem disconnected. Soon, ordinary, vulnerable South Africans will accuse leaders of this august institution of being blithely unconcerned about their suffering.
Yes, interest rate changes are short-term in nature. But in monetary policy, timing is everything. It pays to have good timing.