If the SA Reserve Bank hikes interest rates by 50 basis points this week there will be an outcry from low-income groups. Yet even though the poor are buckling under the pressure of rising living costs the Bank will be justified in taking a scythe to rising inflation and inflation expectations.
It will bear the criticism stoically, explaining how high inflation hurts the poor and those on fixed incomes most; that keeping inflation low and stable is the best contribution it can make to SA’s prosperity; and that the higher inflation, the higher interest rates a country must have — or suffer the consequences.
“It is better to have unpopular central bankers from time to time than hyperinflation and expanding poverty,” Bank governor Lesetja Kganyago told me in an interview before the pandemic.
At the time the Bank was patting itself on the back for having reduced both inflation and inflation expectations from about 6% to the 4.5% midpoint of the target range. It attributed this decline to a combination of factors. First, benign inflation in developed markets meant imported inflation had been negligible. Now, this situation has been reversed. SA’s consumer price index (CPI) is expected to breach 6% this quarter mainly due to food and fuel price pressure caused by the war in Ukraine.
The Bank now estimates that CPI will average 5.8% this year, food inflation will average 6.1% and the price of oil, $103 per barrel. Its implied starting point for the rand forecast at the March meeting was R15.41 to the dollar, but the currency is now trading above the R16 handle. So some of the Bank’s assumptions may be too conservative. The risks are to the upside.
Second, Kganyago explained that SA retailers preferred to endure a margin squeeze than pass on higher prices to embattled SA consumers, given low rates of disposable income growth. But of course, retailers can only do this for so long. The Pietermaritzburg Economic Justice & Dignity group estimates that annual food inflation for low-income households surged 8.2% year on year in April, from R2,227 to R2,414.
Last, Kganyago suggested inflation expectations may have moderated because the Bank had entrenched its credibility as an inflation fighter. So, believing the Bank had inflation under control, business and labour moderated their price and wage demands accordingly. But fast forward to 2022 and wage demands are back up at double-digit levels as workers seek compensation for steeply rising living costs. Public sector trade unions are demanding a 10% increase for the coming year, while the government is offering just 2.6%.
Most economists polled by Bloomberg expect a 50 basis point hike this week. In March the Bank’s monetary policy committee voted 3-2 in favour of a 25 basis point hike. But rising price pressures, increased hawkishness by the US Federal Reserve and rand weakness, may entice it to front-load hikes, opting for a faster, sharper normalisation path.
A 50 basis point hike would be the largest increment since January 2016 and would take the repo to 4.75%. But if it does occur it will not be because the Bank is impervious to the plight of the poor, it will be because it is loath to give up the gains made in anchoring inflation expectations, gains that allowed SA to enjoy far lower interest rates and provided a buffer during the pandemic.
Indeed, the Bank cannot act otherwise and retain its credibility as an inflation fighter. However, to the extent that 2021’s July unrest had elements of a food riot and showed just how easily unrelenting poverty can be weaponised by political opportunists, President Cyril Ramaphosa has a problem.
I would be pouring efforts into improving public order policing and finding ways to cushion the poor, perhaps by bumping up the R480 a month child support grant, which is R144 below the food poverty line. Yes, this would cost money the state doesn’t really have, but in the bigger scheme of things it may be a small price to pay.
• Bisseker is a Financial Mail assistant editor.
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