In another move dubbed the normalisation of the policy rates, the South African Reserve Bank (SARB)’s Monetary Policy Committee (MPC) has hiked the interest rate by 75 basis point. This interest rate hike takes the repo (repurchase) rate for lending between the SARB and commercial banks from 6,25% to 7%, whilst the prime rate (the base rate for the consumers from commercial banks) rose to 10,50%.
By their own admission, the 7% repo rate goes beyond the pre-Covid 19 pandemic levels. This means, they are indeed determined to put us through the pain of interest rates as professed in the last MPC announcement. But what is even more worrying, is the fact that when addressing the Wits School of Governance, Governor Kganyago said there is still more policy rate space. This means, we must expect more interest rate hikes next year.
In previous statements, the South African Federation of Trade Unions (SAFTU) has argued against using interest rates as tools for targeting inflation. It appears that the governor and his committee stretch the expression of Maslow’s Hammer, “if all you have is a hammer, everything looks like a nail”, to absurdity. Despite the available knowledge stimulated by monetary policy debates across the globe, the SA Reserve Bank continue to use the regressive interest rate tools that sabotages the economy further in the context of low growth.
In his own words previously, the current inflation is driven by “supply bottlenecks” (whatever this means), but by using interest rates, Governor Kganyago is squeezing the consumers. In other words, he is punishing the victims of inflation.
As noted in earlier statements, “the idling human and industrial capacity in the country is a testament that different measures other than interest rates can be used to fight inflation. This inflation is not stoked by demand, but by low growth in production and supply.” In fact, even if it was a demand-pull inflation, to solve it, one would have to “strive to raise the production capacity to beat inflationary pressures caused by aggregate demand.”
The trajectory of low growth in the post global financial crisis (GFC), exacerbated by Covid-19 pandemic, has pushed industrial and human resources into idle. The idling manufacturing capacity sat at just over 22% in June 2022, and 12,2 million people are unemployed.
The unutilised capacity has been caused by a combination of factors that include but are not limited to the destruction of local industry by ‘cheap’ imports, the corporate investment strike for the past several years and the neoliberal policy measures that have encouraged government to cut its expenditure and divest in order to make way for the private sector.
Because domestic consumers are not responsible for the current flames of inflation as such, the increase in interest rates is not only punishing them by making interest on their loans and credit facilities expensive, but also by stimulating further inflation in the intermediate period. This is because businesses absorb increased costs on their loans and credit facilities through pricing i.e., increase prices of products on consumer goods.
Furthermore, those small business whose attempt to absorb the increased debt servicing costs by passing such costs onto consumers fail, resort to retrenchments. Therefore, the working-class people bear the pain of interest rate hikes through increased loan servicing costs, higher prices in the intermediate period and retrenchments.
The other element that has a hold on the behaviour of the SA Reserve Bank’s drive to hike interest rates, which Kganyago shy to mention, are currency traders. The
currency traders are engaged in the sale of currencies for the purpose of profiteering. Looking to profit, they dump currencies that have low interest rates for those that have higher rates so that they can profit from the rate differentials.
Instead of defending the buying power of workers’ wages, Kganyago is defending the Rand against currency terrorists. Proof that he is not defending the workers’ wages lies in FNB’s revelation that “80% of the income of the middle-income earners — doctors, lawyers, and professional public servants, etc. — is depleted within 5 days”, whilst “65% of such income is spent on credit.”
This is the reason why the SAFTU campaigns for the defeat of capitalism, and its eventual replacement with socialism — a system based on the production for the satisfaction of human need, and not for profit.