Barely two months after they hiked the interest rate by 0.25%, the Monetary Policy Committee has again raised the cost of borrowing. The “Repo” or “repurchase rate” for lending between the Bank and commercial banks is now 4%, whilst the prime rate that the biggest business can demand from banks, rose to 7.25%.
But ordinary working-class people pay much much higher rates – and the operation of our banking system that redistributes from the poor to the rich, is one reason inequality is the world’s worst in South Africa.
This interest rate hike will definitely have a negative impact on the borrowers and credit
facility holders, whether industrial businesses or consumers who have access to credit. In the face of growing mass retrenchments and wage cuts, these liabilities become more expensive to service, thus putting more and more middle-class and working-class people in a position where they default in meeting their payment obligations.
In November 2021, SAFTU explained the implications of the interest rate hike as follows:
From the prime interest rate, several percentages must be added to small “business loans and home loans, and even more for car loans, student loans and credit cards – leaving the “impaired credit records” (3month arrears rate of consumer borrowers) as measured by the National Credit Regulator moving up much higher again, to in excess of 38% (more than ten million South Africans). Governor Kganyago pointed out to the fears of inflation, as it revised its inflation forecast from 4.3% to 4.9%.”
Using conventional wisdom, hiking interest means that borrowing is more expensive for
businesses and households. Businesses and entrepreneurs become reluctant to borrow and this incentivises them to not invest more, or to expand existing production if that requires credit.
Thus interest rate hikes often sabotage the economy, not only because businesses are discouraged from borrowing to expand, but also because higher rates shrink the market for homes and cars, as consumers become wary of taking such loans.
Though the Reserve Bank superficially uses the interest rate as a measure to target inflation, we actually suffer a relatively low inflation rate, still below the 3-to-6% inflation target range.
In an economy where unemployment has soared – now to 47%, counting those who have given up looking for work – and attacks on wages are rife, the demand for consumer goods is fragile.
We are concerned that effective demand has already been radically reduced by the loss of jobs, by wage cuts and by the collapse of small business, as well as the fixed capital investment strike by big business. Therefore, targeting inflation by making credit expensive for the little pool of the working class who were fortunate to retain their streams of income and who are deep in debt, is a brutal form of economic sabotage.
The Covid-19 fiscal stimulus package –supposedly R500 billion but actually closer to R100 billion since so many Treasury strategies (such as bank guarantees) failed, and corruption proved so distracting – resulted in only meagre incomes coming to the pockets of beneficiaries. The measly R350 per month in the so-called Social Relief of Distress Grant (SRDG), cannot effectively boost demand.
It therefore means that government’s monetary and fiscal policy-makers in the Reserve Bank and Treasury recognised that there was a problem of demand, as well as social stability. Hence it handed out those measly grants to boost demand on consumer goods and to prevent more of the unrest that blew up last July.
But now, the austerity regime that Tito Mboweni and Enoch Godongwana imposed, adds to the monetary tightening of Lesetja Kganyago, leaving the economy with less and less support from the state.
SAFTU does not believe the Reserve Bank’s interest hike and the whole notion of “normalising” interest rates are ultimately about targeting inflation, since so many price hikes are coming from external shocks such as supply bottlenecks. Instead, we think that the Monetary Policy Committee serves the Reserve Bank’s owners, the banks, so its policies increase the profits and interest taken from the economy by the country’s
Normalising therefore means normalising high returns for the bankers and other financial
institutions, at the expense of the rest of the economy.
This financial fraction of capital is already a drain on the real economy, through their own speculative policies, having driven the stock market to 400% above GDP, a “Buffett Indicator” that is consistently the world’s highest for a national economy. While the JSE went from an index level of 34 000 during the crash of March-April 2020, to 76 000 today (a 124% rise), the real economy is still smaller than it was in April 2020.
The banks have never had it easier. They insist on fiscal austerity through lower state deficits, plus interest rate hikes, and both serve their own selfish interests at the expense of everyone else.
It’s time that the balance of forces shifts away from financial capitalists, towards the long-suffering poor and working-class masses, and also towards the businesses that are engaged in real production, that expand their labour force and that are financially patriotic (not sneaking profits abroad).
Kganyago and Godongwana obviously disagree, judging by their higher interest rates and lower state social spending – so it will be up to labour and all our diverse allies to go to the Budget Speech in Cape Town and other Treasury offices across South Africa, to make our voices heard and start reversing the balance of power.
SAFTU reprimand the ANC government and the reserve bank to desist from serving in the interest of big businesses at the expense of poor people and development. The Reserve Bank must stop sabotaging the economy and aim towards developmental and employment goals.