Prominent economist slams Reserve Bank interest rate cut

Economist Dr Roelof Botha said the Monetary Policy Committee (MPC) has kept interest rates too high for too long, becoming one of the biggest impediments to South Africa’s growth.

Botha serves as an economic advisor to the Optimum Financial Services Group and told SABC News that the MPC’s decision to cut rates by only 25 basis points at its latest meeting was “appalling”.

His comments came after the MPC announced on Thursday that it had decided to cut South Africa’s interest rates for the first time in years.

The committee opted to implement a 25 basis point cut, which means the repo rate now stands at 8%, and the prime lending rate is 11.50%.

The MPC’s decision follows positive inflation data released on Wednesday. The CPI hit 4.4% in August, the lowest it has been since April 2021.

The South African Reserve Bank (SARB) has been in a hiking cycle since November 2021, as it has attempted to bring South Africa high, sticky inflation within its target range of 3% to 6%.

This mission saw the SARB hike rates by a cumulative 475 basis points, bringing interest rates to a 15-year high.

However, its efforts have borne fruit, as inflation has been consistently trending downward for the past few months.

Despite this downward trajectory, the MPC has insisted that it would only cut rates once inflation has come down sustainably and is anchored around the midpoint of its target range, 4.5%.

This moment seems to have arrived, as all members of the MPC decided to cut the rate at its meeting this week.

This rate cut will bring much-needed relief to struggling South Africans – particularly those with car and home loans – who are under significant pressure from the country’s high cost of living.

However, Botha told SABC News that interest rates, having been this high for this long, have already done significant damage to the economy and South Africans’ livelihoods.

“That is my concern – that people are losing their houses, and we are not creating jobs,” he said. Botha described South Africa’s monetary policy as “excessively restrictive”. 

To illustrate this, he pointed out that before the COVID-19 pandemic, South Africa’s prime lending rate stood at 10%, when inflation was roughly where it is now.

However, the current prime lending rate following the MPC’s latest cut is 11.50% at the same inflation level.

“It doesn’t make any sense, quite frankly, because this economy has not fully recovered yet from the Covid-19 pandemic and from state capture,” he said.

“What we need in South Africa desperately is economic growth and job creation, and you cannot do that if your real interest rate is amongst the highest in the world.”

He said the MPC – “ five individuals that hold sway over the finances of 60 million people” – has lost sight of the second part of its mission statement, which requires the committee to ensure that the economy grows.

“But they have an obsession with driving inflation down, and that worries me,” he said. 

“My concern is not with people so rich they can put millions of rands into fixed deposit accounts and earn handy interest rates. My concern is with the millions of South Africans that do not have a job.” 

“You cannot create jobs at scale if you have one of the highest interest rates in the world. I do not know what has happened with the Monetary Policy Committee’s understanding of this economy.”

The latest Altron FinTech Household Resilience Index (AFHRI), which Botha compiles on Altron’s behalf, identified a worrying trend.

In the latest AFHRI for the second quarter of 2024, there was a year-on-year decline of 8.7% in the ratio of household income to debt costs. 

“Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs,” Botha said. 

“This ratio has since increased by 37%, with households now having to spend 9.2% of their disposable incomes on servicing debt”.

“It is no surprise that this dramatic increase in the debt servicing costs of households coincided with the decision by the Monetary Policy Committee (MPC) of the Reserve Bank at the end of 2021 to follow a restrictive monetary policy stance.” 

He said this stance has resulted in a relentless increase in the official repo rate, which automatically feeds into South African banks’ prime lending rate.

Botha pointed out that South Africa’s prime rate was 7% at the end of 2021 but has now jumped to 11.75%, representing an unheard-of increase in the cost of credit and capital of 68%. 

He said unwarranted increases in lending rates have a stifling effect on demand in the economy, especially household consumption expenditure and new investment in productive capacity by the private sector.