Busisiwe Mavuso | It’s no use blaming the Reserve Bank for rate hikes

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The Monetary Policy Committee (MPC) of the SA Reserve Bank has come in for some fierce criticism since it began raising rates in November last year, with detractors reasoning that rising prices are being driven by imported costs and not by demand.

As the Congress of SA Trade Unions put it following May’s rate hike: “While acknowledging that price stability is important, we feel that for an economy that suffers from large external shocks, depressing demand through interest rate hikes does not make sense. Using the interest rate when the main driver of inflation is not demand but rather the sky rocketing oil prices, which translate into high food prices, commodity prices and speculative exchange rate fluctuations, alone will not help the situation.”

I think it is important to look at the facts here. Inflation is rising globally and a significant cost-of-living crisis is emerging  for many nations. Following a general rise on the back of the Covid-19 disruptions to value chains and following years of very loose monetary policy and quantitative easing, inflation intensified after Russia invaded Ukraine. In our country’s current economic state, it is critically important for the SARB to stay its course to contain inflation as it must be remembered that targeting inflation is a progressive intervention that provides the stability required for government to drive the socio-economic development we so desperately need. The SARB knows that causes of inflation are largely external but its objective alongside other central banks in raising rates is to prevent a spiral into second-round inflationary effects and wages in particular.

The latest data from Statistics SA shows that in June, South Africa’s  inflation printed at 7.4%, a 13-year high.  In the US, annual CPI hit a fresh 40-year high of 9.1% in June. With policymakers at the US Federal Reserve (Fed) due to meet next week, expectations are that attitudes will remain hawkish and while a further rate hike of 75 basis points is priced in, some believe the Fed may be even more aggressive. Also last week, the Bank of Canada hiked rates by 100bps while the central bank of the Philippines raised rates by 75bp.

Inflation has been at or above the SARB’s 4.5% midpoint target range for 15 consecutive months and by starting to raise rates in the latter part of last year, before most other markets, it can be argued that the MPC’s actions have led to inflation now being more benign when compared to many other countries. Yet some are accusing the SARB’s MPC of not doing enough for our ailing economy and want South Africa to print its problems away.

These advocates of modern monetary theory (MMT), sometimes jestingly referred to as “Magic Money Tree”, believe that countries can fund fiscal largesse simply by printing more money. They feel that the MPC’s focus on inflation targeting is obsolete and often advance the argument that MMT has worked well in the US where new money has been created since the global financial crisis to stimulate the economy, while other developed economies have also taken this route. What MMT cheerleaders don’t realise is that if South Africa – running huge fiscal deficits as we spend more than we earn, with “junk” credit ratings, a very narrow tax base and a with a dependency on foreign capital inflows – started printing money, it would all end in tears. The rand would collapse, inflation would soar and the foreign capital that we desperately need to fund economic growth, would vanish and as a result unemployment would rise even further.

MMT argues that because a government controls the issue of its own currency, it doesn’t need to worry about traditional constraints on its spending. In other words, it can spend as much as it likes to further its policy objectives. As it prints its own money, it doesn’t have to use taxation or government debt to fund its spending needs and if inflation does increase, the government can then raise taxes to curb spending.

The difference of course is that the US has an enormous economy and the dollar is the world’s reserve currency. But our country is a struggling emerging market with high debt – junk-rated – and fighting endemic corruption, and the consequences monetary policy adventurism would be severe, particularly for the poor who will suffer the most from the skyrocketing inflation that results.

The SARB did buy R30bn of government bonds as part of its Covid-19 pandemic response and at the time this was appropriate. In addition, the MPC cut the repo rate by 300 basis points in 2020, driving interest rates to historic lows. But South Africa does not have the capacity to mimic the US by pursuing a massive bond-buying programme. There unfortunately isn’t a Magic Money Tree growing outside the SARB building in Pretoria, nor anywhere else in our Republic.

Our Reserve Bank is a globally respected institution  – one of the very few we have –  we should support it.

*Busisiwe Mavuso is the CEO of BLSA. This article first appeared in Fin 24.

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