Reserve Bank has lost the plot – interest rates in South Africa should be 200bps lower: economist
Despite the pause in interest rate hikes, some economists believe the rate is still far too high – and are laying the blame on the five members of the South African Reserve Bank’s Monetary Policy Committee (MPC).
According to research economist at GIBS Business School, Dr Roelof Botha, the MPC has thus far followed a “ridiculous” trend of interest rate decisions based on what first-world countries are doing – far removed from the realities of South Africa.
This has led to a very restrictive interest rate hike cycle that has punished everyday South Africans harshly, while not having any impact on the true drivers of inflation, as intended.
Last week Thursday (20 July), The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) voted to hold rates – keeping the repo rate at 8.25% and the prime lending rate at 11.75%.
The hold on rates signalled a pause in the SARB’s hike cycle that started in November 2021 – but it does not mean the end of the cycle.
When asked whether interest rates have peaked, SARB governor Lesetja Kganyago said the answer is “a resounding no”.
“Further than this, it depends on what happens to inflation,” he said. “It depends on the data and risks.”
The hold was also a close call. Three members of the MPC preferred to keep rates on hold, and two preferred an increase of 25 basis points.
Speaking to eNCA, Botha said that these words from the governor are worrying and, along with the trend of following the USA’s Federal Reserves’ rate hike decisions, show a lack of economic knowledge that is hurting South Africa.
Real Interest Rates by Country
He said there are clear flaws in the SARB’s Monetary Policy, and changes must be made. He said South Africa’s interest rates could be 200 basis points lower than they are today.
In the interview, Botha said it was a knee-jerk reaction on the part of the MPC to follow the decisions of the US Fed, which operates in the biggest economy in the world – an economy with little in common with South Africa.
“It’s quite ridiculous because the USA effectively has full employment – when you consider voluntary unemployment such as students and people on sabbatical – which we do not have, not even remotely,” said Botha.
“So it’s unbelievable to think that South Africa is trying to follow suit,” he said.
Botha noted that the USA’s real interest rate – which is the prime rate minus the rate of inflation (CPI) – is close to zero. At the same time, South Africa’s real interest rate is approaching 6%.
He said that former SARB governor Gill Marcus understood this.
“It was obvious that she targeted the real interest rate,” he said, adding that on two occasions where CPI went above the SARB’s target range, she didn’t “panic” and hike rates. “She understood economics,” he said.
Botha said that the current MPC doesn’t seem to understand that inflation experienced by South Africa at the moment is fueled by temporary rand weakness, freight shipping costs, and volatile oil prices – all of which are unaffected by the SARB’s rate decisions.
“You can’t fix these things with higher interest rates,” Botha said.
Inflation has peaked in South Africa
Commenting on Kganyago’s warning that the rate hike cycle might not be over and that South Africa may not have reached its inflation peak, Botha said that this is simply a ridiculous statement to make, and it is obvious that inflation has peaked.
“As myself and several economists have pointed out, it’s fairly obvious that South Africa’s CPI and inflation rate has peaked,” he said.
He evidenced the producer’s price index, which has come down from 18% in July 2022 to 7% this year – marking an almost 60% drop.
The SARB must appreciate that we do not have demand inflation in the country, and every economist has pointed to external factors as indicators of the inflation peak, as well as the reasons why inflation has dropped – and it’s not because of the MPCs rate hikes, which have only hurt South Africans and business in the country.
Botha explained that the 700% increase in freight shipping costs is the number one reason the world has been battling high inflation over the last 19 months, which has only recently come down.
The second reason is the oil price, which has now dropped by 40% in the last twelve months, along with some rand strengthening over the last couple of months.
“These are the reasons for inflation drops, not the MPC rate hikes,” said Botha.
MPC members must be reshuffled
Botha said that South Africa is currently at the mercy of only five individuals comprising the MPC, and that they should be shuffled out or the entire structure of the committee be changed.
The economist said that the MPC should include the following:
Three people from the Reserve Bank;
Two from National Treasury (preferably the Director General and chief economist);
Two from the Trade Industry and Competition (preferably the Director General and chief economist); and
Three private-sector economists (preferably a doctorate in economics and at least 25 years of experience).
“I can guarantee South Africans, if this make-up were the case currently, our prime rate would be 200 bps lower than it is today,” said Botha.
He further noted that the inflation expectations that the SARB relies on to make critical decisions are based on a survey conducted among what they call decision-makers in ‘business, finance, and labour’, but the sample size is extremely small – meaning it should never be used to base economic policy on.
“These decisions affect 60 million people in this country, and the survey fails to verify if the responses are objective and based on any authoritative economic research,” said Botha.
“There are so many flaws in the Monetary Policy of the SARB, and it needs to stop fooling around and urgently start focusing on stimulating employment and economic growth,” he said.
