Kganyago’s high interest rate lambasted by economist

A leading economist has taken aim at the Reserve Bank’s monetary policy committee (MPC), accusing it of being an obstacle to growth and investment by keeping interest rates high for longer periods. 

Roelof Botha, an independent economist and economic adviser to the Optimum Investment Group, said the central bank’s preoccupation with inflation targeting was worsening the cost-of-living crisis, as the financial position of households and businesses has not improved much since the first quarter of 2020.

He told Business Times this week the MPC, led by governor Lesetja Kganyago, compared unfavourably with that led by his predecessor, Gill Marcus, which kept the prime rate at minus CPI. 

“If there’s one thing that we can do with the stroke of a pen tomorrow, we can lower the interest rate. The MPC can lower the repo rate and the prime rate automatically. It’s a direct intervention. They can lower it tomorrow and take it back to where it was just after Covid — 7%, which would put the real prime rate, prime minus CPI, at 4%,” he said.

“There are inexperienced economists, and people who don’t understand economics, who will ask how we can go from 10.5% to 7%. And I would like to remind them that during the tenure of Gill Marcus, the previous governor, and the best governor we’ve ever had, she maintained that an average real prime rate minus CPI for five years was 3.4%. I’m actually advocating that the 7% prime rate is a higher prime rate. I’m being more conservative.”

The monetary policy adopted in South Africa has brought damage to the economy, said Botha, who charged that MPC members “don’t have a clue what they’re doing” to the economy. “If you have an inhibiting, high cost of capital, then you’re not going to expand your business — at least not to the extent that you need to create jobs. That should be our only economic priority: to create jobs in this country. Not to lower inflation to some ridiculously low level at a huge cost in terms of lowering GDP.”

He further lambasted Kganyago and the MPC’s stance of targeting inflation at the lower band of 3%. “It’s inconceivable that a country on the southern tip of the African continent, that is far removed from the lucrative consumer markets of South-East Asia, Western Europe, and North America, can think that we can target inflation at one percentage point higher than the US, the most diversified, largest, and most influential economy in the world.

“Our current target range of 3% to 6% is actually okay. I would have preferred that to be more flexible, 3% to 7%. The MPC is out of sync with the international trend for emerging market economies … [which] have realised that one needs more flexibility with inflation targets. There are several of them that don’t even have inflation targets, because growth and employment creation are paramount. Unfortunately, not for the Reserve Bank.”

Tensions flared early in July when the central bank announced it would follow the lower target to guide future interest rates. This prompted finance minister Enoch Godongwana to issue a public rebuke of the move as unilateral. In a joint statement with the Bank on Monday, the Treasury signalled it was becoming convinced of a lower inflation targeting, as its 2024 Macroeconomic Policy Review “acknowledged that low and stable inflation is good for economic growth and concluded that monetary policy goals have broadly been achieved”.

Botha compiled the Household Resilience Index for Altron FinTech, which was released this week. In it, he said the restrictive monetary policy has been the main reason for the consistent decline in the disposable income of South African households in real terms.

Sarb told Business Times that decisions of the MPC were data-dependent and sensitive to the balance of risks to the outlook. “The inflation and repo rate projections from the updated Quarterly Projection Model are a broad policy guide, which changes in response to new data and risks.”

If you look at it from an economic context, the prices reflect deep-rooted socioeconomic issues, including poverty and inequality

—  Andiswa Sibhukwana, economist and researcher at the Competition Commission

The central bank said among the 149 emerging markets and developing economies for which data are available, South Africa’s inflation rate ranked 94th in 2024, despite inflation averaging close to the 4.5% target midpoint.

“Over the past few months, the prospect of a lower inflation target has bolstered the rand and lowered long-term borrowing costs. It is important to sustain this progress, and to minimise uncertainty about the longer-term objectives of monetary policy.”

Meanwhile, the Competition Commission released its cost of living report on Thursday, which warned of a deepening economic strain on South African households, with a disproportionate burden falling on low-income communities.

Andiswa Sibhukwana, economist and researcher at the commission, said food and non-alcoholic beverages consume more than 40% of expenditure for the poorest households, with the impact being “particularly acute” on low-income households.

“If you look at it from an economic context, the prices reflect deep-rooted socioeconomic issues, including poverty and inequality. Essential goods such as food, fuel, and electricity have seen sharp price increases. This ultimately reduces purchasing power, particularly for lower-income households,” she said.

The ongoing energy crisis had led to steep electricity tariff hikes by an average of 12.74% annually, which will disproportionally affect lower-income households due to higher spending on essentials, she said.

The report found that food and non-alcoholic beverages account for 40% of spending in the poorest households, while over the past five years, electricity prices rose 68% and water 50%, both far above inflation.

The Township Entrepreneurs Alliance said entrepreneurs are innovating and pushing through these challenges, but government must “push for fair pricing, better market transparency and access to energy, transport and digital services”.