The South African Federation of Trade Union is dismayed but not shocked by the figures released by the Statistics SA that showed that the country’s annual consumer inflation decreased to 3.6% in November from 3.7% in October 2019. This is a nine-year-old record.
In December 2010 CPI stood at a scandalous 3.5%.
SAFTU and all progressive pro-working-class and pro-poor economists and other formations have consistently condemned the government’s obsession with keeping a ridiculously low inflation target of between 3% – 6%.
While neoliberal economists, multibillionaires and conservative political formations are probably celebrating this news of record low inflation levels, the poor are trembling from the effects of the pro-rich monetary and anti-developmental policies of the government.
The government’s obsession with containing inflation through the manipulation of short-term interest rates combined with widespread financial liberalisation is doing untold harm to the economy. The economy cannot be put on a sustainable footing when our engagement with the rest of the world is dominated by short-term capital flows and not a long-term investment.
The economy also cannot grow when monetary policy (through high real interest rates) restrains investment and growth rather than encourages it. The SARB’s high rate policy starves financing to productive sectors of the economy. The government is following out-dated approaches that were even abandoned in advanced economies (which used Quantitative Easing and interest rate subsidies to revive capitalists after the 2008-09 meltdown).
SAFTU demand that the current monetary policy be radically loosened, as it now creates a situation where cash returns from money market investments currently generate a return of inflation plus 3%-4%. This is not normal, as long-term (10yr) average cash returns are approximately inflation plus 1%. That means there is no incentive for institutional investors to take risks when risk free assets generate these sorts of returns in a low growth environment. Institutions can simply put away their funds in money market portfolios and generate a decent return of 3%-4% above inflation by investing cash in the safest asset class in the market. This is a major disincentive to risking capital in the real economy.
SA inflation becomes the central point as usual when we have to consider the actions of the Reserve Bank. Some believe this should be the only consideration, while others believe growth and employment maximisation should be just as central as inflation. On this question of inflation, we need to ask if the Reserve Bank is attempting to control something when it has little ability to influence in the current situation.
We need a monetary policy decision that cuts interest rates and lowers the cost of borrowing, resulting in higher investment activity and the purchase of consumer durables. The expectation that economic activity will strengthen may also prompt banks to ease lending policy, which in turn enables business and households to boost spending. In a low interest-rate regime, stocks become more attractive to buy, raising households’ financial assets. This may also contribute to higher consumer spending and makes companies’ investment projects more attractive. Having said this, low-interest rates also tend to cause a currency to depreciate because the demand for domestic goods rises when imported goods become more expensive. The combination of these factors raises output and employment as well as investment and consumer spending.
SAFTU reiterates its call that the government must abandon its monetary and fiscal policies that have already to created economic stagnation and catastrophic levels of poverty, unemployment and inequalities.
SAFTU reiterates its call also made by so many including the ruling party, for the nationalisation of the Reserve Bank and changing not just its mandate but its central focus so that it prioritises developmental deficits such as the worsening crisis of poverty, unemployment and inequalities.