Inflation is a complex number to manage. The mandate of the SA Reserve Bank is unambiguous: “To protect the value of the currency in the interest of balanced and sustainable economic growth”.
SA’s inflation target range is 3%-6%, and if the governor had his way I suspect that would be lower and tighter.
It should therefore have come as no surprise to us, as inflation rears its head (note, I didn’t say ugly head) around the world, that the repo rate was increased by 25 basis points after the latest deliberations of the Bank’s monetary policy committee. In fact, common cause would have it that this may just be the starting point of “monetary policy normalisation”, which could see a series of similar hikes over the next 18 months or so.
As the supply-chain bottlenecks brought on by the Covid-19 pandemic gradually unblock we can expect pent-up (or at least impatient) demand to drive prices up, but inflation causes are also wider than that, with other inputs adding impetus. Inflation is on the rise.
But I can’t help wondering whether inflation is our primary enemy, or whether that is weak economic growth. Economic growth will require inflation (at some level) to drive consumer demand. We need rising future prices to attract investment. We need lower interest rates to help sustain indebted individuals at the retail level of the economy (those lucky enough to have access to finance at reasonable rates).
We do need to grow. We’re desperate for foreign direct investment. We need to increase demand. We need to produce more. We need to create employment. Goodness knows, we could do with a little bit of inflation.
The other argument proffered for higher interest rates is the protection of the currency. If the yield of 9.625% (more than double projected consumer price inflation) isn’t enough to attract capital into long-term RSA government bonds, then a 25- basis point increase in the repo rate ain’t gonna do it. There are clearly other reasons, other worries (like our continuously deteriorating fiscal crisis) that are the more powerful forces.
On the back of a commodities boom, resulting in SA recording its largest second-quarter surplus, should we not rather be feeding the ducks that are quacking? Against the backdrop of forecast GDP growth rates lower than population growth, would a weaker rand not serve us well in export earnings growth and help our (arguably) overgeared balance sheet?
It’s complicated, and ultimately it does require the steady hand we have in our governor, given what the alternatives could be. The outlook for the economy, for unemployment and poverty, is very different today than it was seven years ago. So much so that a relook at the band of acceptable inflation and the trading range of the rand may require more frequent examining and adjustment. Policy should be a guideline, not a dictum.
Our circumstances, particularly as they relate to unemployment, are not even vaguely comparable to those of our trading partners, and a more flexible policy stance may be useful in dealing with the specifics of the day as we face them in our present economy, from time to time.
Growth at any cost would be reckless, and we’ve seen how quickly rampant inflation can destroy an economy. But in the dire state our unemployed population finds itself, a little leniency would go a long way to get our growth rate to the levels it needs to be, to begin addressing that.
Our chosen repo rate and currency ranges cannot be determined in denial of the other obvious measures that together determine the state of our broadly-based wellbeing.
Of course, it’s not all about ratios and numbers. The cost of (independent, intelligent, discretionary) capital is determined by risk-return and other economic equations being seen to be in a state of equilibrium, under informed oversight. Until we get that right, we’ll pay over the odds.
• Barnes, a former SA Post Office CEO, has had more than 30 years of experience in various capacities in the financial sector.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.