Coming on top of rampant food and fuel price inflation, the SA Reserve Bank’s 75-basis-point interest rate hike last week will curb consumers’ discretionary spending and further dampen growth. But it was still the right move.
Instead of blaming the Bank for doing its utmost to rein in inflation, South Africans should be calling out Russia for invading Ukraine (the cause of runaway food and fuel prices) and the ANC for ruining Eskom (the cause of exorbitant tariff hikes and load-shedding).
In the absence of a whole-of-government commitment to tackling inflation, all the heavy lifting is left to the Bank, with everyone else acting against it. In June, when headline consumer price inflation (CPI) hit 7.4%, annual CPI for regulated administered prices was 23.4% — five times higher than the Bank’s 4.5% inflation target.
If SA had achieved a prudent public debt level; if the fuel price wasn’t padded out by fuel taxes; if public sector workers didn’t rely on inflation-indexed wage increases; and if public entities didn’t offset their inefficiencies through loaded tariff hikes; the Bank wouldn’t have had to inflict as much pain on the economy as it did last week.
For that is exactly how monetary policy works — by causing pain in the economy, which prevents firms from passing on higher price or wage increases. Take retail. SA’s supermarket chains are consistently profitable, competitive and attuned to the strain consumers are taking. When the Bank makes shoppers more cost conscious, it forces these retailers to endure a period of margin squeeze rather than lose market share, keeping a lid on prices.
But organisations representing the working class only ever see the first part of the equation — that consumers are being squeezed. They forget that inflation hurts the poor and pensioners most (CPI for SA’s lowest income decile hit 9.1% in June) and fail to acknowledge the role played by their working-class members who’ve been striking violently for double-digit wage increases, in contributing to inflation and the real risk of a wage-price spiral.
It’s odd that South Africans have failed to internalise that keeping inflation low and stable is the best contribution the Bank can make to SA’s prosperity, and that the higher inflation, the higher interest rates a country must have — or suffer the consequences. This is not to deny that there is a trade-off between higher inflation and growth, at least in the short term. And that when faced with this stark choice, the Bank has opted to err on the side of taming inflation, which is after all its sole job.
In defending last week’s outsize 75-basis-point hike, the Bank explained that it had to act “to scale and timeously” to prevent inflation expectations from becoming unmoored and inflation from becoming broad-based. Enforcing a little pain now could save SA a lot more pain down the line, it said.
In just nine months, the US (which has been slow to respond to inflation at 40-year highs) has gone from a situation where 10% of CPI items were growing faster than 3%, to one where 80%-90% of items are. In SA, over 50% of items in the CPI basket are now accelerating, which gives the lie to the assertion that domestic inflation is only about externally driven food and fuel prices. In fact, the Bank expects core inflation (which excludes food, fuel and electricity) to climb from 4.4% now to 5.7% over the coming year.
As alarming is that average inflation expectations have leapt from 5.1% to 6% for 2022, and for 2024 — the year in which the Bank expects to have brought inflation back to the 4.5% midpoint of its target range — the expectation is a discomforting 5.4%.
Under these conditions, the Bank would have been delinquent not to have hiked by 75 basis points. South Africans should be thankful we still have one institution that is unafraid to take the hard decisions, no matter how unpopular. For once, the adults are in charge.
• Bisseker is a Financial Mail assistant editor.
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