South Africa

ANALYSIS

From fighting the inflation tiger to squeezing the inflation tighter — a change may be coming soon

From fighting the inflation tiger to squeezing the inflation tighter — a change may be coming soon
(Photo: Unsplash / Jeremy Bezange) | The South African Reserve Bank building in Pretoria. (Photo: Gallo Images / Foto24 / Alet Pretorius) | Adobe Stock

With the ANC under more pressure than ever in the months before an election, it would be rational for the party in government to try to make life as easy as possible for voters. However, it now appears the government is about to go the other way on an issue that will affect everyone fundamentally over the longer term. National Treasury’s hints that it could lower the Reserve Bank’s inflation target could well have huge implications.

As everyone with a mortgage knows, the SA Reserve Bank has a mandate to use interest rates to keep inflation between 3% and 6%. In practice, this means that the bank targets an inflation rate of around 4.5%.

Within this is the issue of “inflation expectations”. In short, if people believe the bank will raise interest rates to keep inflation at 4.5%, then they will not ask for massive salary increases and prices will not rise unduly. If they believe that inflation will be allowed to reach, say 10%, they will demand higher salaries and merchants will raise their prices accordingly. Conversely, if the target is 2% (depending on how realistic the assumption is), it could lower expectations of salary increases and price rises still further.

For some, there would be immense benefits to this.

Millions of people who received the Social Relief of Distress grant of R350 a month in 2020 still receive the same amount of money now — and yet what they can buy with it has been reduced dramatically.

There is another side to this.

The Reserve Bank has been praised for keeping inflation, generally speaking, under control. While food price inflation in SA rose to around 12% in the months after Russia’s invasion of Ukraine, in Hungary it hit 47%, while it climbed to over 10% in the UK and the US.

To keep inflation under control, the SA Reserve Bank raised interest rates many times. By doing so it hopes to curb the consumer demand for goods. When demand drops, then the price of goods (in theory) also declines, resulting in the overall inflation rate reducing or being under control. 

The central bank’s governor, Lesetja Kganyago, pointed out in the last few announcements of the Monetary Policy Committee that they believe “monetary policy is restrictive”.

In other words, the bank is saying that because interest rates are so high, the overall cooling of the economy prevents people from borrowing money to start or expand their businesses, thus not creating new jobs.

With an election looming, one would expect the government to apply pressure on the bank to cut rates.

Instead, it appears the opposite is happening.

Last week, Business Day reported on National Treasury’s “hints” in a Macroeconomic Policy Review published as part of the Budget.

National Treasury is examining whether it can ask the bank to change its mandate. Instead of targeting inflation at between 3% and 6%, the Reserve Bank could lower it to, for example, between 2% and 4%.

Inflation is coming down anyway, and there would be no need to raise rates. It would probably mean that rates would at least remain at their current point for longer.

There is a small possibility that inflation could fall to 3% and allow the bank to cut rates accordingly while still staying within the new target band.

A huge gift

The benefits would be enormous. It would strengthen the rand and protect the value of social grants and pensions. It would protect all of us from inflation, which Ronald Reagan once said can be “as violent as a mugger, as frightening as an armed robber and as deadly as a hitman”.

This would be a huge gift to millions of South Africans. 

On the other hand, some say the biggest problem facing South Africa is not inflation, but unemployment — and that the real cure to our problems is to cut rates and allow businesses to expand and thus employ more people.

For them, National Treasury (and to an extent the SA Reserve Bank) has completely misunderstood the true nature of the crisis, and borrowing money needs to be cheaper to enable more employment. 

This is an intensely political issue.

In the past, the ANC flirted with the idea of moving away completely from inflation targeting. 

In 2009, when Jacob Zuma assumed the presidency, there were concerns that the bank would lose some of its independence or that its mandate would be changed

By 2014, it was clear the ANC was not going to do that, but would stick to the policy.

Now, 10 years later the party appears to be prepared to oversee a hardening or tightening of this policy.

Not entirely unexpected

While the timing, just before an election, is surprising, a brief look at the two main personalities involved shows it was to be expected.

First, Governor Kganyago has made it clear that he believes in inflation targeting and in the independence of the bank.

Last year he gave an address in Washington, DC, in which he said that the bank’s mandate should be to keep inflation at 3%.

The other figure in this is National Treasury’s political head, Finance Minister Enoch Godongwana.

While he has maintained tight discipline over his pronouncements as finance minister, he played an important role as chair of the ANC’s Economic Transformation Subcommittee for a decade.

During this period Julius Malema and his ANC Youth League tried hard to force through the nationalisation of SA’s mines. This was a focal point of our politics from 2010 to 2012.

Godongwana ensured this did not become ANC policy. One of the ways he did this was to control the messaging. Press conferences at ANC indabas and national general councils were often limited to just 10 minutes.

Then, in the period up to 2017, Zuma tried to push through a policy of land expropriation without compensation. Again, Godongwana played an important role in preventing this from becoming ANC policy.

In short, Godongwana could be described as being an effective and deliberate handbrake on the ANC’s populist tendencies during this period. It should be no surprise then that he and Kganyago may both now coordinate such a change in the Reserve Bank’s mandate.

But strangely, despite the deeply political nature of this shift, which would have long-term repercussions, there has been very little public discussion about this by politicians — within the ANC and from other parties.  

A matter of timing

That said, there is another strange dynamic to this, in that the period before the elections may be the best time to do it.

In 2017, while the nation was fixated with the political duel between Zuma and now President Cyril Ramaphosa, a very clever politician, Vali Moosa, pushed through a law imposing tight restrictions on the funding of political parties. 

He would never have been able to do it during normal times — no ANC treasurer would have allowed it. But because the man in that position, Zweli Mkhize, knew he was not going to stay in the position and thus would not have to deal with the consequences, it was allowed to go through.

Also, the fact that the entire ANC (and to an extent the country) was consumed by the battle between the two main groupings in the party at the time meant that many people were too distracted to look under the bonnet of every policy proposal.

There is a resonance of that dynamic here. So consumed is everyone with the elections that this would be the perfect time for those who want to institute a change to push it through — and any appreciable effect on people’s lives would be many months if not years away.

Of course, much can still happen and those working in this direction could find the politics insurmountable. Or, they may, very quietly, push through a change that will fundamentally affect the lives of everyone in South Africa. DM

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