"The interest rate policy of the Reserve Bank and the other central banks in the world is the single biggest delusion in economic science for which there is no evidence," says Fanie Brink, an independent agricultural economist.
He says the Bank's claims that its interest rate policy can control the inflation rate within its inflation targets of 3% to 6% are not true or correct. Its policy can also not protect the value of the currency or stimulate economic growth.
Brink referred to the article “Hoër rentekoerse is ‘onvermydelik’” ("Higher interest rates are 'inevitable'") which appeared in the “Rapport” yesterday.
He says the “inflation rate is determined by all the local and international political and economic factors that have an influence on the demand and supply of goods and services, as well as the value of the currency, respectively.
Economic growth is created by the supply and demand side of the economy, which is proven by Statistics SA every quarter, which is driven by the profit motive of the private sector.”
The inflation rate rose to 5,9% in December 2021, mainly due to the increases in fuel and food prices but has absolutely nothing to do with its local consumption as it is purely the results of international market factors on which the interest rate policy of the Bank have absolutely no influence.
Fuel prices
The international price of crude oil fell last year due to the Covid-19 pandemic to the point where the financial position of some international oil producers weakened significantly that were responsible for the lower crude oil supplies. Now that the greatest danger of the pandemic has subsided, international demand for crude oil has risen sharply again, which the members of the Organisation of the Petroleum Exporting Countries (OPEC) and Russia (which is not a member of the organisation) have not yet been able to meet.
The international price of Brent crude oil rose by more than 60% in 2021, which was the largest annual increase in 12 years spurred by the global economic recovery from the Covid-19 pandemic. Despite the travel restrictions, the demand for crude oil remained relatively solid, while the supply by the members of OPUL and Russia was reduced.
Global oil prices are expected to rise further in 2022, while OPEC and Russia are likely to stick to their plan to increase crude oil supply to the market by only 400 000 barrels per day in February this year.
The international price increases in crude oil are consequently out of control of the central banks who believe that they can correct the imbalance in the market by raising interest rates which is by no means possible, but which as in the past will once again punish local consumers for price increases for which they are in no way responsible for.
In South Africa, fuel prices are controlled by the government and determined by a price mechanism on the basis of changes in the international crude oil price, weakening exchange rate which has already weakened significantly due to the destructive socialist ideology of the ANC government, as well as all the taxes and levies of the government on fuel that are increased annually but which have nothing to do with the consumption of fuel by consumers.
The first question, then, is what can the Bank do about the imbalance in the international crude oil market and the government's fixed fuel price structure? The answer is absolutely nothing!
Food prices
International agricultural producer and food prices increased sharply in 2021 due to international increased demand for food, but even more so due to the "disruption of the global supply chain" that will continue in 2022, according to Cargill CEO, David MacLennan, an agricultural giant in the United States of America (USA), due to labour shortages that have become one of the biggest risks facing the food industry.1)
According to MacLennan, “international food prices rose in October last year to a peak for the past decade which was responsible for even higher grocery bills for households and possible further global famine."
Bad weather hit crops, freight costs skyrocketed and labour shortages hampered the food supply chain. The energy crisis has also caused a dramatic increase in fertilizer costs for farmers around the world.
The search for 'greener' vehicles and aircraft, as well as biodiesel for production and road transport, led to greater competition between food and energy production, which led to limited edible oil supplies. Prices for palm oil, the most consumed vegetable oil in the world, have risen by about 50% in the past year, while soybean oil has risen by 60% and canola oil is near a record price level.
The food and fuel competition for sugarcane, grains and vegetable oils will also, according to MacLennan, become more intense than it has ever been in the past 15 years. The day will come when more agricultural products for clean energy will be used as food, so it will be the duty of the agricultural producers in the world to become more innovative and productive.”
In South Africa this will also have to happen despite the fact that the ANC government is well on its way to finally destroying the agricultural industry, food security and the economy.
The United States of America (USA) already uses 40% of its maize crop to produce bio-ethanol for blending with petroleum produced from crude oil, while Brazil has long been the largest bio-ethanol producer from sugarcane in the world used in vehicles.
The second question is therefore what can the Bank do about these developments that are responsible for the higher international food demand and the higher food prices?
The local prices of agricultural products are traded in a futures market, the South African Futures Market (SAFEX), and are determined solely by the operation of the market forces of supply and demand in the market. The prices of local producers are in fact the international derivative prices of agricultural products traded on the USA futures market, the Chicago Board of Trade, which is also determined purely by the operation of the market forces of supply and demand.
The third question that needs to be asked is what can the Bank do about the increasing and excessive profit margins on food for which consumers are not responsible and which are in no way related to the demand for food?
In South Africa, the agricultural industry is expected to produce “cheap” food for the poor, according to the latest newsletter from Agri SA, while no farmer in the world can produce food at prices that the poor can afford. Food security can only be sustainable if food production is profitable. Food security is also not the responsibility of agricultural producers but the government that determines the macro and agricultural economic policy of the country.
The fact of the matter is that the “consumer prices” used to calculate the Consumer Price Index (CPI) are not the prices consumers are willing to pay for goods and services, but the prices charged by suppliers based on their total production or manufacturing costs plus excessive profit margins are determined.
The question is also why the international central banks believe that punishing consumers on the demand side with higher interest rates can also solve the problems caused by price increases on the supply side of the economy, such as the current lower crude oil production, disruptions in the global food supply chain or natural disasters that cause severe droughts and floods? How is it possible that they believe that higher interest rates can also solve these problems if they have absolutely no control over the supply-driven inflation2) and administered prices of the government.
The interest costs that consumers pay which the Bank targets with its increases in interest rates is not more than 2% of their total consumption expenditure and the weight is so low that it does not even appear on the list of consumers items that Statistics SA use to compile the CPI, and it is therefore insignificant and negligibly small to make an impact on the inflation rate.
Latest inflation trends
The US inflation rate rose to 6,8% in December, the highest level since 1982 and the sixth month in a row of price increases. Petrol prices rose by 58,1% in November 2021 - the largest increase over 12 months since 1980. Within the food index, the prices of grocery stores rose for the third consecutive month.
The inflation rate in South Africa shot up to 5,9% in December 2021, which is the highest rate in almost 5 years. The biggest contributing factor to the higher inflation rate was the fuel price, which has risen by 34,5% since a year ago. "
The latest increases in inflation rates in the USA and South Africa are the results of very serious changes in the supply and demand of especially crude oil and food, which are very clearly outside the reach of the interest rate policy of the Reserve Bank and the Federal Reserve in the USA that have proven once again that there are no other forces in the economy that are stronger than the market forces of supply and demand.
Prospects for crude oil
International crude oil has so far continued its rise in January 2022 to the highest level in seven years as geopolitical tensions arose in the Middle East. Yemen's Houthi fighters have claimed to have launched a drone strike on the United Arab Emirates - the third largest OPEC producer - causing an explosion and fire on the outskirts of the capital Abu Dhabi and raising crude oil prices to the highest levels since October last year.
The shrinking global oil stock is also a limiting factor as to why the Goldman Sachs Group raised its crude oil forecasts to $100 a barrel in the third quarter of this year.
Electricity rates
The next cause for a further large increase in the inflation rate in south Africa will be caused by the expected excessive increases in electricity tariffs which are also set by the government and will once again encourage the Reserve Bank to punish consumers further for price increases for which they are neither responsible for and therefore not the cause for higher electricity tariffs. The higher oil prices have also significantly increased the prices of gas for heating purposes.
Inflation targets
As fuel and food prices are responsible for the large increases in the inflation rate, it is usually excluded from the Consumer Price Index to calculate a "Core Inflation Index" which the Reserve Bank and economic commentators often use as a fallback position if the inflation rate is too close to the upper inflation target moves which is totally misleading and should therefore be abolished.
The inflation targets should be scrapped anyway and interest rates should be determined based on the supply and demand of money and capital in a futures market. Exactly how various agricultural products, such as maize, wheat, soybeans, sunflowers, red meat and wool are traded on the South African Futures Exchange (SAFEX), which is the Agricultural division of the Johannesburg Stock Exchange (JSE) that was implemented on the same basis as the system used by the Chicago Board of Trade in USA. A futures market for money and capital will be the most accurate and fair way to determine or discover interest rate levels without the intervention of the Reserve Bank!
Simple statistical analyses have shown that the changes in interest rates can in no way provide an explanation for the changes in inflation rate, the value of the currency or economic growth. The changes in interest rates are actually follow the changes in the inflation rate and do not determined it! The Reserve Bank is already planning to raise its interest rates four times by 25 basis points in each quarter this year because it is blinded by a computer model that can never take all the political and economic variables that affect the supply and demand in the economy into account. In any case, the Bank does not have a mandate to try to control the inflation rate but a mandate to protect the exchange rate (value of the currency) in terms of section 224(1) of the Constitution.
"It is therefore unacceptable that the Reserve Bank, most economic commentators and the media continue to cling to the Bank's interest rate policy that cannot control the inflation rate, protect the value of the currency and stimulate economic growth for which there is no evidence to substantiate these claims. Consumers can by no means be longer held solely responsible for price increases caused by the operation of the international and local market forces of supply and demand and the excessive interference of the government in the economy," says Brink.
Fanie Brink, Independent Agricultural Economist
1) Cargill CEO Says Global Food Prices to Stay High on Labor Crunch
https://www.bloomberg.com/news/articles/2021-11-17/cargill-ceo-says-global-food-prices-to-stay-high-on-labor-crunch?sref=q8seIhDd
2) Reserve Bank has no control over supply-driven inflation
https://www.businesslive.co.za/bd/opinion/columnists/2022-01-16-isaah-mhlanga-reserve-bank-has-no-control-over-supply-driven-inflation/
