DUMA GQUBULE: Reserve Bank must face up to its responsibility of supporting the real economy

The Reserve Bank’s outrageous decision not to cut interest rates last week, despite dark clouds hovering over the global and domestic economy, has again illustrated the need to scrap inflation targeting and explicitly change its mandate to include economic growth and employment.

With inflation at 4.1% and the prime lending rate at 10.25%, there is no justification for a punitive, usurious real prime lending rate of 6.15% in an economy that will experience the fifth consecutive year of declining GDP per capita in 2019.

At the end of January the US Federal Reserve made a dramatic policy U-turn and decided to halt plans to increase interest rates in 2019, due to cross-currents that included slower growth in China and Europe. During the same month the People’s Bank of China cut its required reserve ratio — the share of deposits banks must hold in reserve — by 1% in a move that was expected to inject $117bn into the country’s slowing economy. On March 7 the European Central Bank also shelved plans to increase rates and announced further stimulus measures such as cheap loans to banks to support the eurozone economy after announcing a drop in its GDP growth forecast to 1.1% from 1.7%.

While the world’s three largest central banks have responded rapidly to lower forecasts for global growth, the Bank failed to reverse a policy error that saw it increase the repo rate by 25 basis points to 6.75% in November 2018.

The Bank signalled there would be another increase in the repo rate by 25 basis points to 7% by the end of 2019. This despite it lowering its forecast for GDP growth in 2019 to 1.3% from 1.7%. The Bank expects growth of just 1.7% over the next three years. This is barely above the population growth rate. Economists have slashed growth forecasts due to electricity supply concerns.

It is time to look beyond state capture and interrogate the role of macroeconomic policy in creating SA’s lost decade in terms of economic development. Former Bank governor Gill Marcus cut interest rate by 700 basis points to 5% between December 2008 and July 2012. There was a modest recovery from the global financial crisis as GDP grew by 2.8% a year between 2010 and 2013. However, deflationary fiscal and monetary policies since 2014 contributed to a sharp slowdown in GDP growth to an annual average of 1.2% between 2014 and 2018. There has been a public sector investment strike since 2015, which has been the major contributor towards low growth in gross fixed capital formation.

The Bank increased interest rates by 200 basis points between January 2014 and March 2016. Astonishingly, after each of the six  monetary policy committee meetings when it hiked rates, the Bank said there were no demand pressures in the economy that had resulted in concerns about rising inflation. The Bank said it was responding to the depreciation of the exchange rate.

Secondary concerns were increases in electricity and food prices. After each meeting it acknowledged that there had been muted pass-through from the weaker rand towards the inflation rate. Every statement also documented in detail how the economy was collapsing. But it proceeded to hike rates anyway. The mind boggles.

However, monetary policy cannot address cost-push (or supply side) causes of inflation. The Bank’s excessively hawkish monetary policies have contributed towards subdued growth in household consumption spending, which is the largest contributor to GDP. Since interest rates are way higher than GDP growth, the Bank has also contributed towards the country’s rising debt-to-GDP ratio.

The Bank fails to acknowledge its role in creating the growth collapse since 2014, which has resulted in rising levels of poverty. It shifts the blame elsewhere. After each meeting it also evades responsibility for supporting the real economy. It says low GDP growth is due to structural issues that are never named and which monetary policy cannot address.

I would go so far as to say the Bank is violating its constitutional obligation to support sustainable and balanced growth. It must look to the US, European and Chinese central banks to learn about the wide range of policy tools a central bank can deploy to support the real economy.

• Gqubule is founding director at the Centre for Economic Development and Transformation.