Hiking rates will be useless as SARB is left without tools
The South African Reserve Bank's (SARB’s) mandate is clear and, thankfully for all of us, it has doggedly stuck to its role, even in the toughest of times.
In fact, the Reserve Bank, probably tired of attacks by various political and labour entities, spells it out on the front page of its website.
"The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic," it says.
Back when pulling the levers of interest rate actually affected the value of the rand and inflation, that directive was worthwhile. But since Russia invaded Ukraine and climate catastrophes became more frequent, the mandate has become increasingly meaningless and interest rate hikes have done little to nothing to calm annual consumer price inflation.
That's no one's fault. The Reserve Bank has no control over what happens between Israel, Gaza and other neighbouring states in that region. It has absolutely no control over climate change – last month was the hottest September on record, with high temperatures spurring wildfires, deadly heatwaves and the mass die-off of hard corals in some areas. That followed the prior month being the hottest August on record.
As the Reserve Bank itself said on 17 October in its Monetary Policy Review, volatile oil prices and changes in weather conditions are upside risks for inflation.
Russia's war on Ukraine was the catalyst for oil prices rising to almighty levels and now the potential for widespread conflict in the Middle East and ensuing supply constraints are causing the cost of a barrel of crude to rocket around again. While that may make South Africans suffer at the fuel pumps from December, the storms and floods that affected the country in September destroyed some crops, among other things. Neither of these factors augur well for food prices and thereby consumer inflation.
Poverty
Crank up the interest rates again at the Monetary Policy Committee (MPC) meeting in November? It won't make a whit of difference.
What it will do is push more people into poverty. The repurchase rate is already at a 14-year high and bad debt levels are rising.
It's been a relief that rates stayed on hold at the past two MPC meetings, but cold comfort for those already battling with the fact that, for instance, what would have once been a R20 000 a month mortgage soared to R30 000 a month over the course of a year.
Unions and some errant politicians like to clobber the Reserve Bank over the head with the growth argument.
Climbing interest rates stifle growth. It's true, but it's the wrong argument.
The trouble now is that climbing interest rates won't impact inflation at all. Reserve Bank Governor Lesetja Kganyago has always said rates are a blunt tool, while leaning on government to come up with better policies. Now there's no tool at hand and the Reserve Bank is rendered impotent in the face of continued exogenous shocks.
Mandate
Unfortunately that doesn't mean rates will fall or stay on hold in November. Kganyago is a measured man and he fiercely defends his mandate. If there's no significant shift toward peace in the Middle East and data such as annual consumer price inflation (CPI), which rose to 5.4% in September from 4.8% in August, continues to indicate that the rand's value is deteriorating, the MPC will hike interest rates further.
The only thing that would avert a hike is a change in mandate. It's nice to have a target of 3% to 6% for CPI. But when hitting the target is akin to giving a blindfolded and very drunken person a bow and arrow and asking them to puncture the front wheel of the third car on the left, it's not a useful target.
It may be that the mandate needs to be modernised. It may need to take into account the fact that South Africa has no control over what its currency does and if climate change worsens, as scientists predict it will, the volatility and lack of control is here to stay.
Granted, this is dangerous territory. Basic economics, tried and tested in many countries, has shown that a disciplined focus on inflation by central banks is about the best weapon a nation has against inflation. Further, some things do change, and sometimes in favour of an economy. If South Africa were to have a dastardly president again and if there were global shifts in its favour, we'd miss the old mandate. But that's not a good enough excuse for not at least considering that the current directive is ignorant of the global realities we're all having to live with.-Fin24
In fact, the Reserve Bank, probably tired of attacks by various political and labour entities, spells it out on the front page of its website.
"The primary object of the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable economic growth in the Republic," it says.
Back when pulling the levers of interest rate actually affected the value of the rand and inflation, that directive was worthwhile. But since Russia invaded Ukraine and climate catastrophes became more frequent, the mandate has become increasingly meaningless and interest rate hikes have done little to nothing to calm annual consumer price inflation.
That's no one's fault. The Reserve Bank has no control over what happens between Israel, Gaza and other neighbouring states in that region. It has absolutely no control over climate change – last month was the hottest September on record, with high temperatures spurring wildfires, deadly heatwaves and the mass die-off of hard corals in some areas. That followed the prior month being the hottest August on record.
As the Reserve Bank itself said on 17 October in its Monetary Policy Review, volatile oil prices and changes in weather conditions are upside risks for inflation.
Russia's war on Ukraine was the catalyst for oil prices rising to almighty levels and now the potential for widespread conflict in the Middle East and ensuing supply constraints are causing the cost of a barrel of crude to rocket around again. While that may make South Africans suffer at the fuel pumps from December, the storms and floods that affected the country in September destroyed some crops, among other things. Neither of these factors augur well for food prices and thereby consumer inflation.
Poverty
Crank up the interest rates again at the Monetary Policy Committee (MPC) meeting in November? It won't make a whit of difference.
What it will do is push more people into poverty. The repurchase rate is already at a 14-year high and bad debt levels are rising.
It's been a relief that rates stayed on hold at the past two MPC meetings, but cold comfort for those already battling with the fact that, for instance, what would have once been a R20 000 a month mortgage soared to R30 000 a month over the course of a year.
Unions and some errant politicians like to clobber the Reserve Bank over the head with the growth argument.
Climbing interest rates stifle growth. It's true, but it's the wrong argument.
The trouble now is that climbing interest rates won't impact inflation at all. Reserve Bank Governor Lesetja Kganyago has always said rates are a blunt tool, while leaning on government to come up with better policies. Now there's no tool at hand and the Reserve Bank is rendered impotent in the face of continued exogenous shocks.
Mandate
Unfortunately that doesn't mean rates will fall or stay on hold in November. Kganyago is a measured man and he fiercely defends his mandate. If there's no significant shift toward peace in the Middle East and data such as annual consumer price inflation (CPI), which rose to 5.4% in September from 4.8% in August, continues to indicate that the rand's value is deteriorating, the MPC will hike interest rates further.
The only thing that would avert a hike is a change in mandate. It's nice to have a target of 3% to 6% for CPI. But when hitting the target is akin to giving a blindfolded and very drunken person a bow and arrow and asking them to puncture the front wheel of the third car on the left, it's not a useful target.
It may be that the mandate needs to be modernised. It may need to take into account the fact that South Africa has no control over what its currency does and if climate change worsens, as scientists predict it will, the volatility and lack of control is here to stay.
Granted, this is dangerous territory. Basic economics, tried and tested in many countries, has shown that a disciplined focus on inflation by central banks is about the best weapon a nation has against inflation. Further, some things do change, and sometimes in favour of an economy. If South Africa were to have a dastardly president again and if there were global shifts in its favour, we'd miss the old mandate. But that's not a good enough excuse for not at least considering that the current directive is ignorant of the global realities we're all having to live with.-Fin24
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