The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) is the economy’s number one enemy, and the entire committee should be restructured.
This is what economist and advisor to the Optimum Group Professor Roelof Botha told eNCA following the SARB’s aggressive 50 basis points interest rate hike on 25 May.
The MPC unanimously voted to raise interest rates by 50 basis points at its latest meeting, bringing the repo rate to 8.25%. “It’s just ridiculous,” said Botha.
This is the highest the repo rate has been in over a decade and the tenth consecutive interest rate hike in the current hiking cycle.
The hiking cycle started in November 2021, and the MPC has implemented 475 basis points of hikes since.
The Reserve Bank has been steadfast in its mission to bring inflation within its target band of 3% to 6%, but inflation has remained high and sticky.
Food and fuel inflation have been particularly stubborn and are the two largest drivers of the country’s high inflation.
However, there is some hope on the horizon, as April’s inflation data showed annual consumer price inflation was down to 6.8% in April 2023 from 7.1% in March 2023.
Botha said that, on the back of growth in wholesale trade and manufacturing sales, inflation is on its way down.
He said these sectors have grown in real terms, and their combined sales values in the first three months of this year were about R1.6 trillion.
He said inflation would also come down because of the decline in energy prices and global freight shipping costs.
However, regardless of these reasons, Botha said inflation in South Africa is not demand-driven but purely supply-driven.
In other words, inflation is driven by increases in the prices of production inputs rather than the demand for products rising faster than the products can be supplied.
Therefore, the SARB’s interest rate hikes will have little effect on South Africa’s high inflation and likely do more harm than good to the economy.
“This is unbelievable, and it isn’t necessary because it’s not going to make a dent in our inflation,” he said of the recent rate hike.
The SARB’s rate hikes significantly burden the economy and could force the country into a technical recession.
However, “the issue here is not whether we will enter the technical recession or not”.
“The issue is that we need more democracy in the interest rate decision because this impacts everybody.”
Botha suggested adjusting the composition of the MPC to consist of ten members.
These ten members must include two top economists from trade and industry, an economist from the National Treasury, and three seasoned veterans of the economics profession from the private sector.
With this composition, “you will have a much more democratic vote, and I can guarantee that, if that were the case, we would have a prime rate of about 150 basis points lower than it is today”.
Some experts have expressed sympathy for the SARB, which must achieve its mandate of bringing down inflation in an operating environment that is working against it.
Efficient Group chief economist Dawie Roodt said he feels sorry for the SARB. He said the Reserve Bank is doing the right thing in trying to bring inflation down by raising interest rates.
However, 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.
There is also a policy clash between the SARB’s monetary and the National Treasury’s fiscal policy. Treasury is trying to boost the economy at the wrong time, with inflation remaining elevated, while the SARB is attempting to bring it down.
This macroeconomic clash between the SARB and the government will result in low economic growth with high inflation.
Chief economist at Sanlam Investments Arthur Kamp has also come to the SARB’s defence, saying it did not cause South Africa’s growth problems.
Rather, the country’s growth problem reflects failing infrastructure, too much government involvement in economic activity, policy uncertainty, and low business confidence.
The country’s sluggish growth and weak currency amidst high inflation places the SARB in a difficult position, as it needs to decide between curbing inflation or providing relief to an ailing economy.