SA Reserve Bank fighting against “dark forces” in the economy

Efficient Group chief economist Dawie Roodt said the South African Reserve Bank (SARB) could try to prevent inflation from getting out of hand, but, eventually, the structural issues in the economy – “the dark forces” – will prevail.

The SARB’s Monetary Policy Committee (MPC) increased South Africa’s interest rate by 50 basis points on 25 May.

The decision received a mixed response, with many experts saying the increase would do more harm than good.

Following the interest rate hike, the rand dropped to its weakest level against the US dollar, which seemed to support this criticism.

Economist Roelof Botha was one of the critics, arguing that 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 of the recent rate hike.

He went as far as calling the Reserve Bank the economy’s biggest enemy and proposed restructuring the MPC.

Roodt does not share Botha’s view. He told Business Day TV that the SARB is not to blame for South Africa’s high interest rates and that tightening monetary policy did not weaken the rand.

“If the Reserve Bank decided to do nothing, I think the effect could have been much, much worse on the currency,” said Roodt.

Instead, SARB governor Lesetja Kganyago in his speech, made it “clear that we are in very deep trouble”. This, rightfully, spooked markets, which led to a sell-off of the rand.

Roodt added that monetary policy alone could not fight inflation. “The Reserve Bank is not as powerful as we would like it to be,” he said.

This is mainly because many other factors, which Roodt called the “dark forces” in the economy, are working against the SARB’s mission to control inflation. 

For example, expansionary fiscal policy and continued load-shedding significantly impact inflation but lie beyond the SARB’s control.

“The Reserve Bank is probably fighting a losing battle. They can try to prevent inflation from getting out of hand, but eventually, the dark forces will probably win this fight,” he said.

In the same Business Day TV interview, Intellidex’s Peter Attard Montalto said it is not the SARB’s job to backstop the currency or ensure the levels or yields of bonds.

However, the SARB does have to “mop up” second-round effects that result from a weak currency.

These second-round effects explain the SARB’s decision to implement a hawkish hike and likely why it will continue the hiking cycle in the coming months. 

Montalto said the SARB has a straightforward monetary policy approach whereby a single interest rate is used to manage inflation. 

However, he explained that the SARB does not try to “stand in the way of whatever the next print in inflation is”.

Instead, the central bank focuses on the second-round effects on inflation expectations, where the bank has some control over the long term.

“They’re trying to prevent price pressures becoming more generalised, and I think they can and will be effective at that,” he said.

“But it’s a long path, and it’s a very loose path, and I think that’s why there can be a lot of criticism because you won’t simply see a pay-off of this hike in terms of inflation in the next couple of months.”