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SARB is wrong to increase interest rates

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The January South African Reserve Bank (SARB) announcement went on as expected, which was that of the sagacious Reserve Bank Governor, Lesetja Kganyago, addressing a quiet room of curious media personnel. The nation waited, dreading the words of ‘a 50 basis point increase’, which was eventually uttered. In the moments following the announcement, the shock and stunning impact of the message raced through the minds of a dazed nation. No one listened anymore to the rest of the Governor’s speech as everyone’s attention was now fixated on the fact that ‘we now have to pay more for everything’.

Prior to the Monetary Policy Committee meeting, a number of analysts and economists droned on about the fact that a stiff 50 basis point increase is expected. According to them, this might be the correct action as rates need to be raised in order to curb inflation. Whilst feeling pleased that this prophecy proved to be true, it was nevertheless a prophecy that spelt doom for the nation. The adherence to a pure monetary policy stance will have the net result of making people poorer. This indeed is a punitive outcome amidst an occasion of weak currency and drought disaster. The very reasons that the SARB cited to justify the rise are, in my opinion, the very reasons why the rise should not have been implemented. Whilst the textbook adherence to interest rates as a contractionary monetarist tool may be applicable during a booming economy tottering on super inflation, the situation is different in the case of South Africa. South Africa has an unemployment level of more than 25% and it is probable that the rate of unemployment may increase.

A weak Rand means that all imported goods become expensive, making the cost of living higher for consumers. Additionally, the currency will be subjected to the market forces and the interest rate aspect will be short lived. Drought conditions also have an impact on agricultural outputs. There is an expectation that South Africa will be forced to import R12 billions of grain to satisfy local demand. The inclusion of high priced corn starch and syrup in most manufactured foods will make for a secondary level of food price increases. Normal elasticity of demand for food means that people will buy food even at a higher price. A higher interest rate does not alter the inevitable food inflation. It only means that consumers will demand less of other goods. Globally, world energy prices have dipped. A low global demand of crude oil and net over supply have resulted in the price dip. Locally, the Rand’s tumble negated the oil moves, resulting in an increase in petrol prices. Naturally, the higher transport price ripples out to inflation for all goods and services.

The notion that higher interest rates lead to more savings is an economics misnomer during a contracting market place. There is insufficient incentive to save in the face of higher prices, as a consumer’s wallet will be emptied by increases in food and transport, and have no surplus left for savings. Slow growth domestically is further endangered by the ratings agency downgrades. Foreign investors have shrunk because of a contracting global economy. There is also a high likelihood of a budget deficit. The clambering from students for free education means that taxes will be upped or that consumers will be forced do without certain state spending. The treasury’s fiscal policy is therefore likely to be painful for consumers and will in all likelihood hurt developmental growth and jobs.

Raising interest during such unusual times may lead to a future of high inflation. In fact, the economy is already contracting because of a global slowdown. The issues of lower employment, high food and energy prices means that business activities are now going to be further cooled by higher interest rates. Internationally, central banks have slashed interest rates as a way to stimulate growth. Their efforts were rewarded with reduced unemployment, rising stock markets, positive growth and the prevention of a catastrophe. It is evident that these central banks acted creatively and made moves that helped people and business. Thus, there is no obligation on the SARB to strictly follow text book monetary policy. The argument that the SARB gains credibility internationally will do very little to immediately move South Africa out of its almost junk status rating, and will certainly not invite investors. In light of the above, SARB’s monetary policy committee have apparently made a wrong decision.

– Adv Lavan Gopaul – MANCOSA , Business Nexus Unit

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