Government to blame for high interest rates

Government spending and repeated above-inflation increases for administered services such as water and electricity supply have kept inflation elevated, forcing the Reserve Bank to keep interest rates higher for longer. 

This is feedback from Old Mutual Wealth investment strategist Izak Odendaal, who said interest rates are unlikely to come down as quickly as previously expected. 

One of the main reasons for this is the conflict in the Middle East, which has kept the oil price high and even threatened to push it above $100 per barrel, resulting in higher fuel prices globally. 

However, there are several local reasons that have kept inflation and, subsequently, interest rates elevated. 

Chief among these are the significant increases in government-administered services, which have run well above headline inflation over the past decade. 

Administered services range from electricity tariffs to municipal charges and have a significant impact on inflation as many of these services are universal inputs in the economy. Thus, when the price for these services rises, the entire cost base of the economy rises, too. 

Odendaal said it is ironic that while the government sets the inflation target for the Reserve Bank to adhere to, it has been the biggest culprit in not adhering to it. 

In particular, steep annual upward adjustments in electricity tariffs and municipal charges have driven overall administrative services inflation. 

The government has also given generous above-inflation wage and salary increases to its workers over the past decade. 

Meanwhile, government inefficiencies, especially local government, significantly raise the cost of doing business. 

“A renewed commitment across government entities to adhere to its own inflation target will go a long way to achieving it,” Odendaal said. 

The rise in administered prices is shown in the graph below. 

Odendaal’s concerns echo those of the South African Reserve Bank (SARB), which said administered price increases are making it difficult for it to cut interest rates in its Monetary Policy Review. 

“As inflation risks emerge and materialise, and services prices normalise, the path back to the target midpoint is expected to take time,” it said. 

“The repurchase (repo) rate at 8.25%, unchanged since May 2023, remains broadly consistent with persistent inflation, the uncertain domestic and global outlook, and getting back to the 4.5% midpoint over the forecast timeframe.”

One factor putting pressure on inflation is administered prices, which the SARB said continue to exert substantial upward pressure on headline inflation. 

“These regulated, public sector-controlled prices impede efforts to bring inflation down and maintain it at the midpoint of the target band; consequently, they also erode competitiveness,” it explained.

“Electricity and water prices, in particular, have for several years inflated at rates well above the 4.5% midpoint of the inflation target band.”

Last year, it was estimated that Eskom had increased the price of electricity by 446% since load-shedding began in 2008, driving inflation in South Africa and significantly increasing the cost of doing business. 

This number is likely far higher now in light of April’s electricity price increase. 

At the start of April, Eskom confirmed that it will implement its annual price increase. The National Energy Regulator of South Africa (Nersa) granted Eskom a 12.74% increase for its direct customers.

“Efficiency gains in these sectors would be important to ensuring that long-run, cost-reflective prices are achieved soon,” the SARB said.

“Other administered prices, such as education and assessment rates, are influenced by headline inflation outcomes and should be more closely aligned to the target midpoint itself.”

“Reducing headline inflation would bring down administered price inflation, creating a virtuous cycle.”


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