Let's Think

Repo rate does nothing for social stability

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All that the announcement of a hike in the repo rate has done for most South Africans is to heighten their angst about how they will keep body and soul together – survive from day-to-day.

The reactions of a myriad of so-called experts and commentators in response to the South African Reserve Bank’s (SARB) announcement at the end of last week that it was lifting the rate by 50 basis points, to 6.75%, to counter inflationary pressures, left us with an extremely complex and confusing picture.

Economists have praised the SARB decision and said while pressure was mounting on consumers, there might be a silver lining in the future. It was, some of them told us, good news for investors when SARB Governor Lesetja Kganyago made his announcement, which for the ordinary man means that his prime lending rate is now at 10.25%.

Kganyago cited concerns about rising inflation as the main reason for his decision.

However, the consensus among the economists runs thin on the matter. In an article on the Moneyweb website, quoting SARB’s head of its research department, Rashad Cassim, we are informed that it is “debatable” whether or not hiking interest rates can do anything about food prices driven by a drought – or a weak currency, wage inflation and higher electricity prices.

The argument goes that at present inflation is demand-driven and does not come from the supply side. “In other words, if inflation is rising because consumer demand for goods and services is pushing prices up, it’s quite easy to moderate that demand by increasing interest rates so that goods cost more.”

Recession or not

To this confusing picture can be added the economists’ debate about the risk of South Africa experiencing a recession during the course of 2016.

According to an article on Independent Online, the SARB was making its decision about the rate against the backdrop that the “… risk of a recession in South Africa this year is mounting, making policy decisions more difficult for a central bank battling to balance the need to contain inflation and support a stuttering economy”.

And what do economists think the risk is? The mean percentage given by nine of them surveyed by Bloomberg this month is 45%, having been 25% in December. The big ‘but’ in that 45%, however, is that it covers a spectrum from somewhere in the low 20% range to 70% by Nedbank’s economist, Isaac Matshego.

Now, what is the risk really? The bottom line is, nobody actually knows – there are just too many uncertainties, from the political, geopolitical, market condition, climate factors and more in both the domestic and in the global economy, to make a sure call.

For one, what will the oil price – which is just about the only thing, according to the Automobile Association, that will buffer SA motorists and businesses against soaring fuel prices as the value of the rand is in decline – do as the year ambles along? Again, nobody really knows.

And then there is the uncertainty of commodity prices and the threat that as many as 32 000 mine workers could lose their jobs.

Some certainty

In this situation just about the only certainty for the man in the street comes in the words of leading vehicle and asset financier WesBank’s head of brand and communication, Rudolf Mahoney, that the rate hike will affect buyers who have vehicle finance agreements structured around a linked interest rate.

“Household budgets are under tremendous pressure. The interest rate has increased 225 (2,25%) basis points in 24 months, meaning those who have had car and home loans since the start of the rate-hiking cycle will now really start feeling the effects,” Mahoney said in a statement.

Another certainty is that the gloomy economic picture will put pressure on South Africa’s already fragile social stability and that in this election year there will be plenty of finger-pointing from political parties and other actors on the public stage.

The Democratic Alliance was quick to say President Jacob Zuma shouldn’t get to keep his job, while South Africans lose theirs. Various ANC spokespeople have also been constantly and increasingly playing the ‘race card’ to try and deflect blame mainly to whites.

Bottom line

The bottom line is that former trade union boss, Zwelinzima Vavi, was probably right when he tweeted last week that a “10.75% prime rate means more houses, cars dispossessions more factory closures and more job losses, hardships & deepening of poverty” and that the “crisis is the 8.3 million unemployed not keeping inflation at 3-6%. Increasing price of money worsens joblessness.”

What would, however, be highly irresponsible under present circumstances, is to use this reality to try and mobilise and inflame people’s fears for the sake of short-term political gain or narrow ideological aims.

Now is a time for leaders on all fronts in society to stay calm and rather use the crisis to engender a spirit of “we are in this together and for one another” instead of an “us and them” polarisation.

That the former is possible, we have already seen in how people have responded to the drought and the water crisis of fellow citizens and communities. The latter would see a resurgence of xenophobia, conflict and the development of a full-blown revolution.

Also read: The repo rate hike will do little to curb inflation

by Steve Whiteman

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