A economic advisor believes the restrictive monetary policy stance, regarding interest rates, which was adopted by the South African Reserve Bank’s Monetary Policy Committee (MPC) at the end of 2021 is hampering the country’s economic growth.
Dr Roelof Botha, economic advisor for Optimum Investment Group, who was the keynote speaker at the Durban Chamber of Commerce and Industry’s gala dinner on Wednesday night, said interest rates have remained high for too long. The MPC announced its first interest rate cut in four years in September. It reduced the interest rate by 25 basis points.
Botha explained that factors such as high shipping costs and higher Brent Crude oil prices caused inflation to rise during the Covid-19 pandemic. But Botha said that once the situation normalised, inflation was bound to fall, and the MPC was too quick to hike interest rates from the end of 2021.
He added that during the past 12 months, households and businesses have been saddled with the highest lending rate in 14 years and also one of the highest in the world.
“Although the Monetary Policy Committee (MPC) of the Reserve Bank has finally provided millions of indebted South Africans with marginal relief. The MPC is very far behind in reversing the restrictive monetary policy stance.”
Botha said that he believed that the MPC didn’t grasp the cause of higher inflation during the Covid-19 pandemic.
“Higher inflation was felt immediately after one of the worst lockdowns imposed due to the outbreak of the Covid pandemic. No country in the world escaped the twin effects of a 720% increase in global shipping freight charges (between the third quarter of 2019 and the third quarter of 2021) and the 430% increase in the price of Brent crude oil (between April 2020 and the beginning of 2022).”
Botha added that these price shocks impacted on cost-push inflation and were the two key reasons for the sharp rise in consumer inflation.
“It seems clear that excess demand had nothing to do with the temporary rise in the CPI. By raising interest rates to record high levels, the MPC’s policy approach only served to reduce aggregate demand in the economy. Inflation was bound to start declining again once freight costs and fuel prices started to normalise.”
Botha said that he believed that there should not such importance placed on inflation expectations.
“Apart from the fact that significant variations permanently occur between the results of quarterly surveys on anticipated future inflation and observed inflation, the samples for these surveys are minute and devoid of meaningful academic substance.”
Botha added that the costs of an overly restrictive monetary policy were huge.
“Due to the absence of any sign of demand inflation, interest rates have been unnecessarily high and have served to restrict South Africa’s economic recovery from the Covid pandemic. The most significant direct cost has been the erosion of household disposable incomes.
“In the first quarter of 2022, just before the negative impact of the rate hiking cycle started to bite, the ratio of household debt servicing costs (mainly interest on loans & credit) to household disposable income stood at 6.7%. The relentless rate hiking experiment by the MPC was directly responsible for this ratio increasing to 9.2% in the first quarter of 2024, with the second quarter estimate standing at 9.4%.”
Botha said that the debilitating effects of record high interest rates on the economy were visible in virtually every economic indicator of note, including negative per capita GDP growth.
“South Africa’s residential property market has been exceptionally hard hit by the high interest rates, which have served as a disincentive for home buying. Since the rate hiking cycle began, the BetterBond Index of home loan applications is down by 28%.”
Botha added that it was abundantly clear that monetary policy was on the wrong track – a track that is busy destroying jobs and keeping the economy from expanding.
Economist Dawie Roodt said that although he agreed that the MPC could have cut interest rates by a bit more in September, he believed that they were cutting interest rates the right way.
“I don’t agree with Dr Botha’s definition of inflation. I don’t think it’s just two things like shipping costs and Brent crude oil that affects inflation, it’s a whole range of things that causes inflation to rise.”
Roodt added that he also disagreed that there shouldn’t be an emphasis on inflation expectations.
“It is crucial to get inflation expectations lower before you have interest rate cuts. I’m happy with how the Reserve bank is approaching the situation to cut interest rates, it’s impossible to get the situation 100% correct but they are doing a good job.”
In September, the MPC explained that while global inflation was slowing, there was still a case for caution due to the “difficult and unpredictable geopolitical environment, with risks of inflationary shocks through trade restrictions and supply chain disruptions”.
The Mercury