SARB interest rate hikes defended

Hugo Pienaar

Bureau for Economic Research (BER) chief economist Hugo Pienaar defended the South African Reserve Bank’s decision to increase interest rates to the highest in fourteen years.

Many experts criticised the SARB’s decision, arguing that higher interest rates do not address the underlying reasons for load-shedding.

Economist Roelof Botha called the SARB’s aggressive 50 basis points interest rate increase on 25 May “ridiculous“.

Botha said inflation in South Africa is not demand-driven but purely supply-driven.

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.

Pienaar does not share Botha’s view, saying the Reserve Bank did what it is supposed to do based on its mandate.

“Some have again argued that because transitory supply side factors drive inflation, tackling this with a higher policy interest rate is futile,” Pienaar said.

He said the problem with this argument is that South Africa has had a sequence of supply shocks.

  • The first was pandemic-related, as lockdowns caused shipping delays and freight costs surged.
  • Just as this was normalising, the world was hit by energy and food price shocks after the Russian invasion of Ukraine.
  • Locally, the country experienced price shocks through sustained rand weakness, load-shedding costs, and foot-and-mouth disease.

“The sequence of shocks meant the SARB could not, with any degree of certainty, bank on transitory forces on its own doing the work to lower inflation,” Pienaar said.

“There is no way any credible central bank would simply accommodate these pressures and allow expectations of future inflation to run away.”

He highlighted that South Africa saw several multi-year wage settlements of way above the SARB’s preferred 4.5% mark.

“To ensure long-term price stability, SARB is constitutionally bound to show unease with this. To do this, it only has a blunt instrument, the policy interest rate. Painful but necessary,” he said.

Pienaar said it is often hard to think counterfactually, but it is necessary given the range of price shocks over the last 18 months.

“Take a moment to contemplate where South Africa’s inflation would have been had the SARB not lifted the policy rate. Also, bear in mind the policy rate was raised from a multi-decade low level,” he said.


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