We take a look at South Africa's official inflation rate (CPI) over time and plot it on a line graph which shows using different coloured bullets, when the South African Reserve Bank raised or cut the repurchase rate (Repo) rate, which in effect leads to increases or decreases in the interest rates charged by banks.
South Africa's monetary policy is set by the South African Reserve Bank (SARB) and currently, their mandate is price stability. Basically, keep inflation under control. So the SARB has an inflation targeting policy of keep inflation between 3% and 6%. And should inflation get close to or go above the target, interest rates are increased to curb consumer spending. Lower spending leads to retailers and businesses reducing prices to get rid of stock, which in turn cools inflation down. This is all fine and well when inflation is caused by consumers (Demand pull inflation). But what about cases where external shocks such as a weaker exchange rate or higher oil prices lead to higher levels of inflation. Should consumers be punished for these type of temporary external shocks? Surely not. But currently, interest rates are the only tool used by SARB to control inflation. And with a struggling economy, raising interest rates hurts consumer spending even more, which in turn will affect the already weak economy. South Africa's monetary and fiscal policy mix is also out of sync in most years, which again negatively affects the potential economic growth that could be achieved by South Africa
The line graph above shows South Africa's monthly inflation rate from the start of 2012 up to October 2018. It also shows the SARB MPC decisions on interest rates. Green bubbles shows when the SARB MPC decided to cut the repo rate, and the red bubbles show when the SARB MPC decided to raise interest rates. As the graphic shows, South Africa has had a cluster of interest rate increases since 2014, with rates being raised 3 times since 2014 up to October 2018, and 4 times (if the latest interest rate hike in November 2018 is taken into account) while the inflation rate was still within the SARB's inflation target range. Interest rates were raised 3 times while the South African CPI was above the inflation target.
Since 2012 South Africa had 3 interest rate decreases. When rates were decreased in July 2012 South Africa's Repo rate was sitting at 5% and inflation at just under 5%. Currently, South Africa's inflation rate is sitting at 5.1% yet interest rates are at 6.75 %. So while the inflation rate is at a fairly similar level to that of the July 2012 interest rate cut, interest rates are a lot higher, in fact, interest rates are 35% higher now than it was in July 2012 yet inflation levels are very similar. One has to question the wisdom of the MPC in raising interest rates in November 2018 when looking at this graphic. 6 years ago inflation at current levels saw a rate cut, now it sees a rate increase (and this largely due to inflation that was fuel by higher fuel prices and a weaker exchange rate). Both of these external threats to inflation has subsided substantially since the last interest rate hike in early November 2018. But the damage is done, rates have been increased and SARB won't cut it soon, even if inflation comes down as it would make it look like they don't know what they doing by flip-flopping between rate hikes and increases.
And the last rate increase came at a time when South Africa was still in a technical recession (2 consecutive quarters of negative economic growth). While South Africa has exited the technical recession, with GDP for 3rd quarter 2018 coming in at +2.2% it was coming off a low base and we suspect most of the growth in the quarter was due to base effect.
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