Source: SARB


South Africa’s central bank Monetary Policy Committee (MPC) is hell bent on fighting inflation, with the only tool their members know: hiking interest rates. Tailing the US Federal Reserve, and amplifying the pain by twice what the North is suffering, the South African Reserve Bank (SARB)’s MPC hiked the interest rates by 50 basis points, bringing the repo (repurchase) rate from 7.25% to 7.75%, thus raising the prime lending rate (the base rate for big corporations from commercial banks) to 11%.

In total, the interest rate hikes have soared by more than 4% since the the so-called normalisation began in November 2021. Effectively, the repo rate has grown by a cumulative 121,42%.

The South African Federation of Trade Unions (SAFTU) reiterates our opposition to this rate hike. We oppose higher interest rates as the only means of fighting inflation. Interest rate hikes have dire consequences for the living standards of ordinary workers, unemployment and the livelihoods of small business traders, as well as the productive economy as a whole. Only the bankers are smiling now.

International monetary system for the rich

Previously, we noted how Governor Lesetja Kganyago and his colleagues continue tailing the Federal Reserve – but now it’s far worse. Since the advent of financiers, speculative chasing for profits has undermined real productive activity. This often creates volatility in the foreign exchange (forex) market – such as today with a rapid artificial strengthening of Rand to well below R18/$. It is this volatility, amplified by floating currencies, that makes Governor Kganyago tail the Fed, but thereby undermine South Africa’s real economy.

In a currency swap of two currencies, the traders benefit from buying the currency whose central bank has at least temporarily higher interest rates, and then selling the currency at lightning speed once fashions switch. Such speculative currency attacks generally have a devaluating effect on the currency that is being dumped. So those who believe a stronger Rand will prevail because of the rate hike, will suffer from the financiers’ whims.

Under the regime of liberalisation adopted by SARB in 1995 when the Financial Rand exchange controls were abolished, currency traders have an indirect hold over a country’s monetary policy. In other words, conditions that made the Rand vulnerable, putting SARB under pressure from currency speculators, are actually self-imposed. It is the policy of financial and trade liberalisation imposed by the ANC government in the mid-1990s – especially the periodic removal of exchange controls – which has put the Rand in this position of precarity, susceptible to attacks by currency profiteers. The last such liberalisation was in February 2022, when Finance Minister Enoch Godongwana allowed R4 trillion to escape by lowering the local investment requirement for institutional investors from 70% to 50%.

Therefore, to create a buffer and defend the Rand against currency speculators, and to allow a lowering interest rates, the government must reinstitute capital and exchange controls.

Creating unemployment to fight inflation

It is important to put into perspective the Rand’s precarity. The policy of financial and trade liberalisation stems from the ideology of neoliberalism, which is not forced on a helpless ANC that wants to do good by her people. No! The ANC is a willing participant which has adopted neoliberalism, and is so committed to this extreme version of capitalism, that it will be the reason for its 2024 electoral defeat.

Because they are convinced neoliberal capitalists, Kganyago and Godongwana are using neoliberalism in other areas of monetary and fiscal policy. Hence the use of interest rates to fight inflation.

In our previous statement about Kganyago’s incessant interest rate hikes, we expressed concern that his MPC always sees inflation as a result of excessive money supply and in turn, excessive “effective demand” in the economy, including that derived from workers’ wages. Their invoking of interest rate increases to fight inflation, will reduce this “excessive” money supply by making borrowing and repayments far more costly. This typically aims at reducing money that consumers could use on consumables, and to induce austerity and unemployment. Neoliberal monetarists consider unemployment the quickest way to diminish the money supply.

So the MPC have been deliberately inducing defaults and bankruptcies, especially of small businesses, in the hope that they will retrench workers as part of balancing input costs, thus lowering effective demand – and presumably, inflation. However, the reality is that the working class has suffered shrinking real (after-inflation) wages for many years, especially the civil service which from 2020 (until this week’s wage settlement) suffered negative interest rates. Inflation has mainly been imported, especially caused by energy, food and now monetary price hikes emanating from Western markets and the Russian invasion of Ukraine.

Unemployment and deepening poverty

Our country is ravaged by high unemployment and poverty, and any responsible central bank will not hike interest rates to induce a recession and unemployment. Such a policy path is not only unreasonable, but treasonous.

But why do they go ahead with this treason? It is because they are acting on behalf of finance capital. Besides incentivising the currency traders to speculate on currency, and shifting resources from productive to financial capital, this represents the shifting of wealth from the poor to the rich. The overwhelming mass of the working class, who have far more financial liabilities (loans, credit card facilities, retail credit lines, etc) than assets, will pay far more in servicing the debt.

We made this point, already two months ago: “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.”

For 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.

We are appalled by this further transfer of wealth from the working class to the financiers.

In the past, we have argued that the idling industrial capacity should be activated – if necessary by nationalisation – in order to ensure a rising supply of goods and services, which will in turn have a deflationary pressure. In fact, our manufacturing industry’s idle capacity must not be the only thing that is now targeted for growth: our overall industrial capacity must be expanded. Idle industrial capacity sat at 21,7% in 2022 with ailing aggregate demand (due to the rising cost of living) being the primary cause.

Further, by reinstated what is now an idle industrial capacity, employment will be created which will help alleviate the problem of unemployment and its spouse, poverty.

Because it is dedictated to neoliberal monetarism, our central bank is not willing to champion development that does create conditions for accumulation and enrichment by the financiers.

SAFTU is fighting for the Reserve Bank to change its policy, especially its rising interest rate trajectory. That policy continues to worsen our living conditions, whilst pretending to defend the buying power of workers’ wages.

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