The Monetary Policy Committee (MPC) has hiked the interest rate by 75 basis point. This interest rate hike brings the repo rate for lending between the SARB and commercial banks to 5.5%, whilst the prime rate (the base rate for the consumers from commercial banks) rose to 9%.
In his briefing to the media, Governor Lesetja Kganyago has said that amongst others their decision was informed by protecting the currency from pressures such as inflation. But the South African inflation does not seem to be demand driven, it is pushed by pressures on the supply side.
For instance, the Gross Domestic Product (GDP) for the first quarter of 2022 grew at the same rate as the consumption on it, at 1.9%. In 2021, the aggregate GDP grew 0.1% above the total expenditure, meaning demand and consumption could not have had inflationary pressures.
Based on this evidence, it means that the inflationary pressures driving inflation in the country come from somewhere and not from demand. Besides, the buying power of households has declined as a result of mass retrenchments and the declining rate of wages in this period, in which employers have pushed for below inflation increases.
If inflation is not driven by demand, what are its sources?
The South African Federation of Trade Unions (SAFTU) reiterates its position that inflation in the country currently is caused by the supply factors relating to shrinking production and imports.
In our previous statement we highlighted that the manufacturing has been operating at under-capacity. The under-utilisation capacity of the manufacturing capacity today is even worse, higher than it was during the financial crisis of 2007-2009: the underutilisation was 14% in 2007 and today it is estimated at above 20%.
Similarly, the decline in number of farms is indicative of the supply bottlenecks that are responsible for the inflation. The total number of farmers dropped from 128 000 in 1980 to 40 000 in 2011. Today, they have declined to 32 000 in 2022. In addition, the commodity trading that has become more prevalent is also responsible for pushing prices higher for the purpose of profiteering.
The MPC’s target of inflation by always using interest rates as an instrument is problematic in this context because inflation is currently supply driven. Government must among others inject capital to increase the productive capacity of industries and agriculture so that production could be higher and meet future growing demand. Further, the state must take control of the under-utilised productive capacities in the manufacturing sector that has been unutilised for the past 20 years and more.
Commodity traders must also be curtailed from stoking the flames of inflation by hoarding goods and causing prices to rise so that they can profit.
Impact on the borrowers and workers
Contrary to Governor Kganyago claiming he is defending the purchasing power of the salaries of ordinary workers by hiking interest rates, he is actually eating directly into these salaries, and worse, even pushing most of these workers out of work. Those workers who hold financial liabilities such as home loans, mortgage, credit facilities, car loans and other forms of loans will see the cost of their debt increasing and clawing more on their wages and salaries.
The Consumer Default Index of quarter 1 of 2022 shows that there are 23,1 million consumers with credit facilities and different types of loans. First National Bank (FNB) revealed in its study earlier this year that 80% of the income of middle-income earners — doctors, lawyers and professional public servants amongst others — is depleted within 5 days. In 2021, it was reported that about 70 -75% of such income is spent on credit. Consequently, interest rate hikes will worsen conditions of the middle-income earners who are financially supporting extended families.