The central bank’s decision to keep the repo rate steady despite inflation easing closer to its target of 3%, has drawn mixed reaction from economists.
Duma Gqubule, an independent economist, said the MPC's response to inflation proved that the central bank should play a role in the economy in supporting the government’s goal to grow the economy and create jobs.
“The bottom line is we have a real prime lending rate of 10.5% and inflation at 3.3%. There is ample scope to have more cuts in the economy. The Reserve Bank can’t be independent of the imperative to grow the economy and create more jobs,” Gqubule said.
Speaking on Thursday to communicate the decision to hold rates, Reserve Bank governor Lesetja Kganyago said since September last year, the MPC had reduced rates by a total of 125 basis points — and it wanted to see how this was “affecting the economy, how expectations evolve, and how inflation risks are resolved”.
The forecast has rates easing gradually as inflation returns to the bottom end of the 3-6% target range. The MPC emphasises that stabilising inflation at 3%, rather than 4.5%, implies a lower longer-term level for the policy rate.
— Lesetja Kganyago, Reserve Bank governor
“The forecast has rates easing gradually as inflation returns to the bottom end of the 3-6% target range. The MPC emphasises that stabilising inflation at 3%, rather than 4.5%, implies a lower longer-term level for the policy rate,” he said.
Its economic modelling shows inflation expectations play an important role in shaping the transition to its preference for a 3% anchor, Kganyago said.
However, Gqubule was adamant that the MPC’s assessment was incorrect.
“He [Kganyago] says the inflation pressure is coming from meat, food, and fuel prices. These are supply-side shocks in the economy, and monetary policy can’t do anything here. So why are you making people pay more for their bonds and cars? It doesn’t make sense."
In a discussion document prepared for its national general council in December, the ANC said macroeconomic policy should move from a narrow focus on inflation targeting, which might mean “accepting slightly higher inflation in exchange for lower interest rates to stimulate investment”.
“The Bank’s mandate could be updated — via statute or shareholder directive — to explicitly pursue employment and growth. Prudent fiscal policy should not equate to austerity in a joblessness crisis — government should be willing to run deficits to finance growth-promoting investments, as long as debt remains sustainable in the long run, with the debt-to-GDP ratio reduced by a higher denominator [of] GDP. Creatively accessing concessional development funding can also be part of the financing mix.”
Gqubule said supply-side costs need to be addressed directly, and failing to respond appropriately was like “burning the house down to roast a pig”.
He accused the MPC of being insensitive to the economic realities of ordinary South Africans who are facing rising costs in goods and basic services, while the economy is still going to feel the pressure from the 30% US unilateral tariffs.
He called for a change in the composition of the body: “The Bank of England has nine members of the committee and four [external] members. We must change the composition of the MPC to allow an external mandate. You can’t have a central bank that is independent of national goals. We have to grow the economy and create jobs.”
Dawie Roodt, economist at Efficient Group, said changes in the interest rate can take up to two years before that works its way through the economy.
“The impact is not immediate ... it takes time. And that’s what the Reserve Bank says. They’ve cut rates quite a lot already, and they’re not sure what the impact of that is going to be on the economy, and they want to wait a little bit more,” he said.
Roodt said the central bank decided to hold rates because the MPC knew that “they’re going to get inflation down to 3% come hell or high water ... If you have an inflation target of 3%, which we now have, then perhaps you have to keep rates a little bit on hold for now, but to reduce rates, say within two months or so.”
Matthew Parks, Cosatu’s parliamentary co-ordinator, said the ANC-aligned labour federation was “deeply disappointed” at the MPC’s decision, adding that a cut would have provided breathing space to millions battling to cope with the rising costs.
“The Bank needs to seize the opportunity of an inflation rate that has fallen for the past two months and that at 3.3% is well within the approved inflation target range of 3% to 6% and utilise its November MPC meeting to slash the repo rate by at least 50 basis points,” he said.
Dr Roelof Botha, an economist for Optimum, previously told Business Times it was ridiculous to tighten rates and seek to keep wage inflation low when wage increases in the private and public sectors were low.
“The MPC and this opinion on a tighter inflation target is wishful thinking,” he said.
“They are living in a dream world. It is inconceivable that a country on the south of the African continent, so far removed from Asia, Europe, and America, can target a tighter target than the world.”
Redge Nkosi, the executive director and head of research for money banking and macroeconomics at Firstsource Money, said the MPC and the central bank were right-wing and “unaware of issues in the broader monetary sphere”.
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.