The Reserve Bank’s monetary policy committee (MPC) crossed the line last week when it unilaterally implemented a 3% inflation target — a major change in monetary policy that has implications for a battered economy — without the approval of the president, cabinet, other members of the “government of neoliberal unity”, parliament or the Treasury.
This means interest rates will remain higher for longer — for no reason. SA already has a punitive, usurious real prime lending rate of 7.5% in an economy that will grow by less than 1% during 2025.
The SA Federation of Trade Unions condemned the move by the MPC to circumvent democratic processes by lowering the inflation target without the formal approval of the Treasury. EFF parliamentary researcher Gumani Tshimomola said the Bank had “gone rogue”.
For too long the Treasury and Bank have been too powerful and arrogant despite their incompetence, which has created an unviable economy. In a victory for democracy, the Treasury was humbled like never before after suffering the humiliation of having to draft three budgets in 2025.
The time has come for South Africans to tell the Bank to stay in its lane and stop its offensive campaign to bully the country into submitting to a 3% inflation target. We cannot have a situation where the tail is wagging the dog. There must be democratic processes, including debates in parliament and at the National Dialogue, about the ownership, independence and mandate of the Bank. We must debate whether inflation targeting is an appropriate policy in a country that has the world’s second-highest unemployment rate after Eswatini, with 12.7-million people who can’t find work.
Nationalising the Bank would be the easiest thing to do, since the shares are worth only R15m. An offer at double the price would probably convince most of the Bank’s shareholders to sell. Central bank independence is a myth, not a reality. The Bank cannot be independent of national goals. It must also target growth and jobs.
As we saw during the pandemic, when central banks financed government spending, the separation of monetary and fiscal policies does not exist in major economies. Nobel laureate Joseph Stiglitz writes that the crude recipe of inflation targeting — increasing interest rates whenever price levels exceed a target level — is based on little economic theory or empirical evidence.
“There is no reason to expect that regardless of the source of inflation, the best response is to increase interest rates.” Inflation is not “always and everywhere a monetary phenomenon” as Milton Friedman said. Since the introduction of inflation targeting in February 2000, there has never been a situation in which there was excess demand — too much money chasing too few goods and services — that required interest rate increases. There has always been excess capacity — too little money chasing too many goods and services — even when the economy was growing at 4.5% a year in 2003-08. Inflation has been “always and everywhere a supply-side phenomenon”.
Every spike in inflation was caused by a combination of supply-side shocks — including exchange rates, international oil and food prices, and droughts. All supply-side shocks are transitory and eventually work themselves out of the system through base effects. When inflation has declined it has never had anything to do with monetary policy settings.
The Bank lacks the policy tools to address supply-side shocks. Why should it target something it cannot control? Using interest rates to address supply-side shocks is the equivalent of prescribing water to cure a broken leg. The only way to address them is through targeted fiscal and industrial policies.
• Gqubule is an adviser on economic development and transformation.
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