SAFTU OPPOSES THE INTEREST RATE HIKE
In yet another painful blow, the South African Reserve Bank (SARB)’s Monetary Policy Committee (MPC) has hiked the interest rates by 25 basis points. This rate hike brings the repo (repurchase) rate from 7% to 7.25% and takes the prime lending rate (the base rate for the consumers from commercial banks) to 10.75%, from a 10.5%.
The South African Federation of Trade Unions (SAFTU) opposes this rate hike, as it will have negative impact on the living standards of workers and have a devastating blow on small business enterprises.
This interest rate means the rates have increased by a cumulative 375 basis points since the so called normalisation of policy rates began in November 2021. In other words, the interest rates have grown by 107% in the past fourteen months.
In our reaction to December’s inflation rate last week, we expressed the unfortunate pretext such inflation rate would create for the neoliberal monetarists at the Reserve Bank to hike interest rates. This interest rate hike has proven our prediction. The way officials at the reserve bank follow neoliberal monetarism, it does not take rocket science or sophisticated forecasting to predict their interest rate path.
SAFTU remain opposed to the imported inflation targeting policy. This instrument that may be tailored for highly developed economies (this view is also contested) with high living standards has been transplanted into a country with massive developmental backlogs. For quite some time now, our country holds the three most infamous world records: that of having the worst unemployment rate among the industrialised countries, high poverty rate and being the most unequal society on earth.
Regrettably, the Reserve Bank continue not to take these critical areas of development in its policy. To make things worse the band of 3% – 6% inflation target is way too low, such that at slight increase of inflation interest rates are used to weigh heavily on the ordinary working people. The economy is paying a heavy price to realise this target.
Despite admitting that the current inflation is flamed by supply bottlenecks, the monetarists continue to target inflation through the demand approach. They increase interest rates with the aim of reducing money in the pockets of people, so that they can reduce aggregate demand. This method comes at huge economic and social costs.
In contrast to their interest rate trajectory, SAFTU has argued that the current inflation rate should not be fought with interest rate hikes especially since there is consensus that it is not triggered and flamed by demand pull factors. It is not excessive money or idle money in the pockets of consumers that is causing this inflation. Therefore, interest rates are not suited tool to wrestle it.
In the past, SAFTU has repeatedly pointed out that the idling industrial capacity should be powered in order to ensure a supply of goods and service, which will in turn have a deflationary pressure. In fact, the industry’s idling capacity must not just be the only thing that is powered; the overall industrial capacity must be expanded. The idling industrial capacity sat at 21,7% in 2022 with ailing aggregate demand (due to the rising cost of living) being the primary stimulating factor.
Expanding industrial capacity should be geared towards creating employment and ensuring that the estimated half of the population that is living in poverty will not have inflationary pressure on the general prices of goods and service as soon as their income is augmented through social grants, jobs guarantee or ordinary job creation.
But bosses are not interested in powering the idling industrial capacity, and neither in expanding productive capacity. They have opted to pack their monies in financial assets rather than invest in productive sectors. In 2017, they were said to have hoarded R1,4 trillion. Because this money is not hoarded in the idle sense, but packed in financial assets; It has probably accumulated to above R2 trillions.
Interest rate hikes have contributed to the worsening living standards as the cost of living increases with every increase in rates. Firstly, the interest rates makes the costs of borrowing high. For workers, this means the interest they pay on home loans, car loans, mortgage bonds and other types of credit facilities increases. The immediate effect of this is on their spending behaviour: they must decide which household essentials to prioritise and which to drop.
Hence people have decided to reduce certain food consumables from their daily food staple, and at the same time spend 65% of their income servicing credit. It is therefore no surprise that FNB reported that 80% of income of the middle-income earners — the real holders of credit and loans — is depleted within 5 days of receiving it.
The overwhelming 70% of workers who earn less than R5 900 per month are also indebted through Mashonisa (loan sharks), as they try to juggle around the rising cost of grocery, transport and electricity.
On small businesses, the impact is also devastating. Unable to keep up with rising costs of servicing their loans and credit facilities, small businesses absorb these increased costs through pricing of their products. In the intermediate period, interest rates are therefore inflationary.
Eventually, small businesses go bankrupt, and then opt to retrench or close businesses altogether. In this way, interest rate hikes are creating unemployment. This unfortunate consequence of interest rate hikes is not an unintended consequence, but a deliberate aim of the monetarists. Hence, some central bank governors across the world have even spoke of the need to stoke a minor recession to fight inflation.
Immersed in neoliberalism, our central banks are not champions of development, and we should expect little out of them.
SAFTU is fighting for the reserve bank to change its policy rate trajectory. It is worsening living conditions, whilst pretending to be defending the buying power of workers’ wages.