EDITORIAL | Extra pain for consumers as Bank holds line on inflation threat

Reserve Bank governor Lesetja Kganyago has gained a reputation as a monetary hawk, ever ready to raise interest rates at the slightest sign of inflation picking up. He has become the scourge of a middle class groaning under the combined impact of elevated interest rates, soaring administered prices in the form of property rates and other municipal utilities, and static wages.

At a stroke this week, Kganyago’s monetary policy committee, by a vote of four to two members, raised the repo rate by 25 basis points, bringing the prime lending rate to 10.5% and piling extra pain on consumers whose houses, cars and big appliances are mostly funded by credit in an economy largely driven by consumer spending.

The governor has argued in the past that high rates have little to no impact on the poor, who largely do not access credit in the way middle-class consumers do. He maintains that the poor, the majority in South Africa, are disproportionately affected by inflation, which erodes their buying power in an environment of low wages, rising food and transport costs, and the threat of unemployment.

Some will argue that our interest rates are already too high for an economy that desperately needs growth and jobs, which is not only an economic imperative but which has profound political implications for a young democracy.

The fact that so few emerging economies have yet raised rates in response to rising oil prices and supply-chain disruptions resulting from the US’s disastrous military adventure in the Middle East will also attract criticism.

Yet the inflation figures are a boost to Kganyago’s argument. Before the Bank’s rate hike, Stats SA reported that consumer inflation rose to 4% in April, a big jump from 3.1% in March. This is a threat to the Bank’s policy of an inflation rate of 3%, with a one percentage point tolerance band. Producer inflation is also up, portending price increases to come.

The big unknown is the fuel price. With an 11% increase in April, the biggest on record, and uncertainty about the status of the Strait of Hormuz, through which 20% of the world’s oil flows, oil prices pose an imminent threat.

With the oil price hovering at $100 a barrel, we are not yet in red-light danger territory, but no-one can say with certainty how high oil could go. South African motorists have responded to higher fuel prices by driving less, while the removal of state aid in the form of fuel-levy relief will hit motorists in the pocket.

One positive outcome of the rate increase will be a tendency for the rand to strengthen, thus curtailing the price of imports, especially fuel.

But the increase will curb growth, which is vital to South Africa’s future, as businesses face higher set-up costs, putting a damper on meagre fixed capital investment.

Not for the first time, and certainly not the last, consumers are expected to share the pain. Critics argue, however, that the rate increase will only marginally restrict inflation because the main cause is external shocks, not internal dynamics.

The Bank is frequently the target of anti-austerity critics, but expect Kganyago to stick to his guns.

So, while the Bank may be criticised for acting too fast, the truth is that the rate increase will have limited impact on growth. And to the extent that it contributes to a more stable currency and prices, the counter-argument that sees the middle class paying more for credit should always win the day.