Over the course of the past several days South Africans have again been hit by the double whammy of increased interest rates and increased fuel prices. The link between the two is simply that in the aftermath of the onset of conflict between Iran and the US/Israel, oil prices spiked, as they generally do during times of conflict.
This time it was the issue of disruption of a key transport corridor — the Strait of Hormuz — that ushered in an elevated crisis. As a channel through which large volumes of oil are transported every day, any form of disruption to the strait directly affects oil prices and essentially binds the aggressors and the innocents in the ensuing economic fallout.
The nature of energy prices and their effects on all other dimensions of economic activity means no country is fully insulated from the consequences. Persistent conflicts create market disruptions that ultimately feed into the economic fundamentals of each country. For South Africa, the inflationary effects of higher oil prices are a problem that pits the South African Reserve Bank against all of us.
As an institution guided by its mandate of inflation targeting, the Reserve Bank is bound to respond to any looming inflation red flags through its single most potent and perhaps only critical instrument of intervention — interest rates. When the bank takes the view that the inflation horizon warrants intervention, it raises interest rates, as it did last week. The recent shift towards a singular reference inflation target rate of 3% rather than a range has altered the latitude the bank has. If inflationary expectations are projected to breach the latitude range, credibility questions regarding the bank’s ability to execute on its mandate will escalate.
The problem is that most citizens would argue that the response of raising rates is characteristic of a broken loop, as the driver of inflation — increased oil prices — is an exogenous development that has little to do with the long-term fundamentals of the economy. Even the purported ideal of interest rate adjustments — influencing the economy via the transmission mechanism where higher rates ultimately lead to a cooling down of the economy and a decline in the inflation heat — is hard to sell to citizens, who feel the response should not worsen their cash flow situation.
In countering the impact of higher oil prices, the National Treasury — responsible for fiscal policy — has implemented relief measures via the fuel levy, which has mitigated the impact but does not, on its own, solve the problem. The effect of this is that we are all essentially dependent on the ability and willingness of Donald Trump and his acolytes to reach a solution to the conflict and bring the oil markets back to a steady state and equilibrium position. Unfortunately, that requires the type of political maturity and diplomatic finessing that has hardly been evident in the actions of the Trump administration.
The one option that might bring some semblance of common sense is the looming US midterm election season, which might reignite some form of accountability in the US political system, which has seemed more imperial than democratic since Trump’s re-election. Unfortunately, the idea that the fate of the world is in the hands of the voters of one nation, whose political persuasions are as polarised as those of the US, invites new forms of reckoning for the world at large.
The reality is that Trump’s MAGA doctrine enjoys a resonance among American voters that will persist long beyond his presidency. The Middle East conflicts also have a persistence that has prevailed for decades and will continue beyond the Trump years. This means the persistence of the threats of disruption will linger for longer, and there’s not a lot the rest of us can do about it.
• Sithole (@coruscakhaya) is an accountant, academic and activist.
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