The governor of the Reserve Bank shocked the nation with the sharpest increase in the repo rate, from 4.75% to 5.5%. This comes against a steep hike in petrol and diesel prices. These are at R24 a litre, and when I last filled a tank, it emptied R2,500 from my already perforated pockets. The 75 basis points adjustments could have not come at a worse time. SA is in the dark from load-shedding, cold weather and soaring food prices. It comes at a time when the R350 SDR fund has not been paid for the months of April and May. Half of the beneficiaries of the SDR have now been left out as the nitpicking machine chases trivia matters.
Such a hike in a low-growth economy remains detrimental to investments in the real economy and can only serve to attract financial investments which include hot money. To this end, the wisdom of having a state bank that de-risks lending for investment in the real economy, is necessary and long overdue, if the case and battle for a multiple mandate for the Reserve Bank to stimulate the economy and employment in addition to the declared one of protecting the value of the rand has been lost. After this hawkish stance, market watchers witnessed the exchange rate drop from R17.14 to the dollar to R16.84 by Friday. Dr. Asghar Adelzadeh, in his seminal discussion paper titled “Why is the SA Economy Stuck in Chronic Crisis”, argues: “The data on monetary policy indicators confirm that monetary authorities in SA have successfully adhered to mainstream economic views of using monetary policy tools to predominantly fight inflation. Therefore, as in the case of fiscal policy, monetary policy has been restrictive in the past 25 years.”
As a consequence of this policy stance, the long-term interest rates have remained higher than the real GDP growth as shown in the graph below.
The question now is, to what extent is the inflation-targeting regime serving the interests of economic growth and employment, when the evidence points to long-term real interest rates that stayed well above the real GDP growth rate for 18 out of 24 years? The next question: is the hawkish stance that has emerged with the latest increase of the repo rate by 75 basis points not gifting us the same trajectory on real economic growth and employment we witnessed in the past? More importantly, does the reasoning by the MPC consider interest rate decisions as divorced from economic growth? Have they tested for the dependence and impact of such decisions on growth? Adelzadeh confirms: “The direct footprints of the Reserve Bank’s inflation targeting policy are evident in the data related to interest rates, credit extensions and money supply, which are policy variables that are governed by monetary authorities.”
Leaving the decision on the exclusive shoulders of the governor excludes key policy areas that would have made SA the richer had it drawn from the core policy areas that deal with the economy and employment.
Another matter of concern is the composition of the monetary policy committee (MPC). It consists of the Reserve Bank staff exclusively. Embedded in this sort of operational model on a matter of public interest is the fundamental problem of an “incestuous” relationship. While the voting is transparent and debates are surely robust, this matter cannot be left to the governor and his/her employees, regardless of what committee they have constituted. The historical data shows the real interest rates have undermined growth because the GDP growth in most years since 1996 has been below real interest rates. Under those circumstances, investment appetite is blunted, growth will be muted and unemployment is bound to rise. A consequence of this magnitude cannot be left to the governor and their subordinates. As oft said, statistics is too important to be left to statisticians; the case of monetary policy committee cannot be left to a committee of the Reserve Bank.
Interest rates affect household income and expenditure as well as business investments. Leaving the decision on the exclusive shoulders of the governor excludes key policy areas that would have made SA richer had it drawn from the core policy areas that deal with the economy and employment.
Trade and industry and business associations must be represented, and National Treasury and labour. The representation of these could be such that there is an equal number of insiders to outsiders, and the governor should not vote but have a deciding vote in case of a tie. Such a scheme can bring to the fore the key policy implications of interest rates on employment and economic growth and could invariably lead to a different economic impact trajectory. Interest rates in the context of targeting inflation are a matter of life and death. They are too important to be a matter for the MPC as constituted.
Dr Pali Lehohla is the director of Economic Modelling Academy, a professor of practice at the University of Johannesburg, a research associate at Oxford and a former Statistician-General of SA
