Efficient Group chief economist Dawie Roodt said, “I feel very sorry for the South African Reserve Bank”, which is trying to reduce inflation while government policy is accelerating it.
Roodt made these comments in an interview on Newzroom Afrika, where he outlined his expectations for interest rates.
At the last Monetary Policy Committee (MPC) meeting, the South African Reserve Bank (SARB) raised the repo rate by 50 basis points to 7.75%, bringing the prime rate to a 14-year high.
South Africa’s latest inflation data showed inflation to be 7.1%, with food inflation at 14%. For Roodt, this is very concerning and means the SARB has no choice but to raise rates at its next MPC meeting.
However, it is unlikely the SARB will raise rates by 50 basis points again, with a 25 basis point hike the most likely outcome.
Roodt said the reserve bank is doing the right thing in trying to bring inflation down by raising interest rates while calling on South Africans to support its efforts.
But, the SARB is limited in what it can do. It cannot address structural economic problems keeping inflation elevated, such as electricity prices and deteriorating infrastructure.
He is most concerned about the clash between the SARB’s monetary and the National Treasury’s fiscal policy.
Reserve Bank vs Treasury
The SARB is putting its foot on the brakes, trying to reduce demand and slow the economy down. The Treasury, in turn, is stepping on the gas.
Treasury is trying to boost the economy at the wrong time, with inflation remaining elevated.
This macroeconomic clash between the SARB and the government will result in low economic growth with high inflation.
The government’s commitment to expansionary fiscal policy actively undermines the reserve bank’s attempts to bring inflation down.
Roodt said politicians like inflation because it erodes the value of the government’s debt, allowing it to spend more while not increasing debt in real terms.
Thus, he “suspects that, in future, politicians will put more pressure on the reserve bank to relax monetary policy”.
Such calls are heard already, with politicians in the government and the opposition calling for the nationalisation of the SARB and changing its mandate.
Thus, Roodt said, “I feel very sorry for the South African Reserve Bank”, as it is under pressure to reduce inflation while the government and politicians are urging it to stimulate economic activity.
The losers of this will be South Africans, with economic growth being limited by this macroeconomic confusion.