Government to blame for high interest rates – Reserve Bank

Lesetja Kganyago

The government has increased prices for administered services at a rate far above inflation over the last decade. Coupled with a lack of delivery, this drives inflation higher, forcing the Reserve Bank to raise interest rates.

This is feedback from the South African Reserve Bank’s Monetary Policy Review, which outlined its approach to monetary policy and the factors influencing interest rate decisions. 

Aside from the unusually large supply-demand imbalances caused by sudden restrictions and relaxations on economic activity, the Reserve Bank singled out government-administered price increases as a driving force behind inflation. 

Price regulation, whereby an independent body or the government sets prices, can be used to enhance the performance of monopolies. 

If implemented correctly, they can ensure a lack of competition does not result in inefficiencies or abuse of market power.

Essentially, they can incentivise monopolies to operate as efficiently as they would in a competitive environment. 

However, in South Africa, this is not the case. 

Administered prices have outstripped inflation over the last decade. Electricity, water, fuel, and property costs have skyrocketed. 

From January 2009 to December 2022, the price of electricity rose six-fold, water four-fold, and fuel three-fold. The Consumer Price Index (CPI) over the same period only doubled. 

Accounting for inflation, electricity prices have risen 60% in real terms, while fuel levies have increased nearly 40% in real terms. 

This data does not even consider the implementation of an 18.7% price increase for electricity in 2023/2024. 

The Reserve Bank said such increases are “costly to the economy” as they drive inflation and complicate its ability to maintain price stability. 

Many of these administered prices are for goods and services that are universal economic inputs. Thus, they raise the cost base of the economy and make everything more expensive. 

The SARB also lamented that “many municipalities do not employ any discernible framework to determine the level of increases in tariffs”. 

Rate increases are seemingly made on a whim without consideration of the effects of such increases. This “suggests substantial deficiencies in the current regulatory framework”. 

Kganyago blames the government for inflation

Apart from the above data and analysis from the SARB’s Monetary Policy Review, the governor of the Reserve Bank, Lesetja Kganyago, has been vocal in his criticism of the government’s role in driving inflation. 

Kganyago refers to “idiosyncratic factors such as load-shedding and the country’s greylisting”, keeping inflation elevated in South Africa while it is declining globally.

In particular, the ongoing energy supply challenges are fuelling inflation by raising operating costs for businesses which are passed on to consumers.

The Reserve Bank estimates that load-shedding adds 0.5% to inflation in 2023, and this is something it can do nothing about.

The SARB has to fight inflation “in a context where many of the drivers of both inflation and growth are outside of its control”.

It can only “effectively smooth business cycle fluctuations” by raising or cutting interest rates.

Furthermore, “fighting inflation is much harder when the economy is already underperforming” due to structural constraints that must be solved at the government level.

The Reserve Bank cannot solve these structural issues nor influence long-term growth – this requires sound economic policy from the government.


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