Just as the Reserve Bank Governor announced the increase in the repo rate two months ago, we knew that another hike was on the cards.
Events since then have strengthened the argument. Further increases in the USA and Europe suggest that the war against inflation is not over. Here, the revelation that the hoped-for 2022/2023 government primary budget surplus was not going to be achieved suggests more fiscally-induced inflationary pressures. This is compounded by the announcement that civil servant wage increases will be higher than budgeted.
Meanwhile, minimum wages are set to increase at a rate in excess of the headline inflation rate, which means that the unit costs of labour will rise at a faster rate than labour productivity increases. This will fuel inflation through the supply side of the economy. And if all of this was not enough, the effect on the already beleaguered exchange rate of the Rand of the speculation regarding an “arms deal” with Russia has added insult to injury.
Considering the Reserve Bank’s constitutional mandate, the Monetary Policy Committee (MPC) has no choice but to announce a further increase in the repo rate on Thursday.
Until a few days ago, many would have hoped that a 25-basis point increase would have sufficed – especially in light of the torpid economic growth performance, the persistently high unemployment rate, the decline in retail sales, and the seemingly never-ending misery brought about by pervasive load-shedding.
Unfortunately, the recent exchange rate turmoil has seemingly raised the chances of a 50-basis point increase. This is unlikely to result in a strengthening of the local currency; it could, however – all things being equal – help to stem a swift and vicious further weakening.
The Reserve Bank (and its critics and supporters) should also be cognisant of the fact that monetary policy can only really have a bearing on the general price level via its influence on various monetary aggregates, which, in turn, are determinants of aggregate demand. Right now, a number of inflation-inducing forces fall outside the ambit of monetary phenomena. These include fiscal laxity, the international US$ price of oil, supply chain disruptions, high energy prices, rising labour costs, rising food prices, and increases in other administrative prices. When do we reach a point where any further interest rate hikes fail to stem inflation and succeed in creating only more economic misery?
On balance, a 25-point increase would arguably be the more reasonable path to follow at this stage, especially if the effect on the exchange rate of the alleged Russian arms transaction turns out to be short-lived.
In fact, in the absence of any new major inflationary forces, this month’s increase might be the last for a while, with the next adjustment – a downward one – being sometime during the first quarter of next year.
Prof Andre Roux is an economist at Stellenbosch Business School