The application of monetary policy is a complex function that often expresses the outcome of its deliberations in simple prescriptions, like setting interest rates. The latest 75 basis point increase in the repo rate from 4,75% to 5,5% will have the effect of increasing debt servicing costs by well over 10% as all interest rates adjust in response.
The rand-dollar exchange rate (sometimes proffered as the country’s “share price”) appreciated quite nicely in anticipation of the move and the hawkish outlook it ushers in, but even this heavy dose of medicine may not be enough.
I’ve always been critical of quantitative easing as a blunt tool, made even less relatively effective as everyone does it, and I have a similar concern over simply using interest rates when things go the other way.
I am grateful for the enshrined independence of the SA Reserve Bank and would stand down in the face of more rigorous analysis by better qualified professionals. Nonetheless, it occurs to me that we’re giving a general antibiotic to treat a variety of different diseases, and that repetitive doses may well lead to the treatment becoming ineffective.
While the symptoms may appear similar and the prognosis fairly obvious (inflation is bad, after all) the causes this time are somewhat different and arguably not systemic, and the patient is not generally well enough to take just any dose of medication. The situation is made worse by the fact that the patient, SA Inc, is neither fit nor disciplined enough to take its medicine.
It is all very well making money more expensive to lessen demand, but the state of individual consumer indebtedness, particularly among the poor, is such that the additional servicing burden is simply not bearable. Never mind buying more. Given the number of unemployed dependents with little or no prospect of getting a job, our employed breadwinners are at their limits already. Whatever the prescribed medicine seeks to achieve, the patient’s body must at least be capable of repair.
In desperation, the already stretched go in seek of higher wages to counterbalance the effects of increased interest rates. Wage increases aren’t awarded willy-nilly nowadays (particularly where inflation, not productivity, is the principal argument) and the strikes that most often precede their settlement damage the economy and reduce employment prospects even further.
The Reserve Bank, like a doctor, has a mandate and must do what has to be done without influence, fear or favour. Its monetary policy committee (MPC) therefore had no choice but to increase rates, and I’ll be surprised if we don’t see more increases in the near future.
If, however, we don’t want more and more of this blunt instrument imposed on us we’d better play our part in getting this economy fit, by living within our means and creating opportunities for more people to work and fewer people to have to depend on social grants and other forms of handouts.
The responsibility falls on business, primarily, which in turn, must be encouraged and enabled through appropriate policy implementation and efficiency of government.
That part is not going so well. In fact, the government is dysfunctional across so many measurements that the prospect of a collapsing economy, or even a failed state, is no longer a notion too absurd to contemplate.
If you want to see high inflation (with high interest rates following closely on its heels) look no further than the failed economies and governments of the world. A terminally ill patient cannot be rescued by medicine, no matter how big the dose. Even less so, a corpse.
Our independent Reserve Bank and its learned MPC can only do so much. If SA Inc refuses to play its part all will be in vain. The sooner our political and business power bases get together to craft a common purpose growth strategy, the better.
If we don’t manage to get over our outdated differences in time, we’ll simply all fail together. That would just be stupid, and it’s not too late. Yet.
• Barnes, an investment banker, has more than 35 years’ 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.