News

SARB wrong to increase interest rates

Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn

The January reserve bank announcement was as expected, the sagacious reserve bank governor Lesetja Kganyago, a lonely figure addressing a quiet room of curious media. The nation waited dreading the words ‘a 50 basis point increase’, which finally was uttered. In the moments that followed the announcement the shock and stunning impact of the message raced through the minds of a dazed nation. Whatever the Governor said after the half percent increase did not register since we were fixated on the fact that ‘we now have to pay more for everything’. The days before the Monetary Policy Committee meeting heralded a time when most analysts and economists droned on about the fact that a stiff 50 basis point increase is expected. After all this would be the correct treatment, ‘yes he has to raise rates to curb inflation’. Post the announcement we nodded, feeling pleased that we were correct. Correct about a doomsday prophecy.

The adherence to a pure monetary policy stance will have the net result of making us poorer. This is a punitive outcome amidst an occasion of weak currency and drought disaster. The very reasons that the SARB cited to justify the rise, I suggest are the reasons why we should have gone flat. The textbook adherence to interest rates as a contractionary monetarist tool may be applicable during a booming economy tottering on super inflation. Our current stance is different, South Africa has an unemployment level of more than 25% . Many mines will shed jobs and at least one bank has revealed big staff cuts. The rate of unemployment may higher.

A weak rand means that all of our imported goods are more expensive, this is a stinging assault on the consumer. A higher interest rate theoretically means rand demand, I speculate that the demand may only be in the very short term. Our currency will then again be subjected to the market forces and the interest rate aspect will be short lived.

Drought conditions will have an impact on agricultural output. There is an expectation that we will be forced to import R12 billion 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 the higher price. A higher interest rate does not alter the inevitable food inflation. It only means that consumers will demand less of other goods.

World energy prices have dipped, a low demand globally and net over supply of crude oil confirmed the slide. Locally the rand’s tumble negated the Oil moves, leaving us with even higher 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, 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 are already a small population because of a contracting global economy. Rating agencies that push us to an almost junk status remove the welcome mat from SA’s invest door.

In a few days we will hear the minister of finance share his budget plans for this year. There is a high likelihood of a budget deficit. The clambering from students for no fees means that taxes will be upped or that we will be forced to do without certain state spending. Treasury’s fiscal policy is likely to be painful for consumers and in all likelihood hurt growth and jobs.

Raising interest rates is a blunt tool, there may well be a case for lifting rates in a swelling economy, however these are unusual times. We may well be peering at a future of high inflation, however this economy is already contracting because of a global slowdown. Our burdens of lower employment, high food and energy prices means that business activity is now going to be further cooled by higher interest rates.

Internationally, central banks have slashed interest rates as a way to stimulate growth. Much of the efforts of quantitative easing was guided to prop up the economy and bolster business. These global efforts were rewarded with reduced unemployment, rising stock markets, positive growth and the prevention of a catastrophe. These central banks acted creatively and made moves that helped people and business. There is no obligation on the SARB to strictly follow text book monetary policy. Whispers that the SARB gains credibility internationally will do very little to immediately move our almost junk status rating, this will not invite investors and it will not feed the starving unemployed masses. SARB’s monetary policy committee, you were wrong.

Adv Lavan Gopaul – Mancosa, Business Nexus Unit

Chat with us, we are online1
;