OSAGYEFO MAZWAI: Reserve Bank navigates SA’s currency conundrum amid state missteps

The SA Reserve Bank usually steers clear of controlling the currency and capital flow into SA as an overarching objective. These forces are the purview of the state, with many levers at its disposal, most importantly projecting SA as a safe investment destination. As a safe investment destination, the currency ought to be stronger than it is, and international capital should flow into SA as a consequence of this. Unfortunately, policy missteps and public sector maladministration have led to a sharp depreciation of the rand and extensive foreign capital outflows.

The outcomes of the Bank’s rate hikes are emerging. Numbers are swirling around on the increases in home loan and vehicle finance costs, up 38% and 12% respectively, which are particularly concerning for middle-income consumers. Lower-income consumers are also being dislodged by higher food and transportation costs, which are a result of structural issues in the economy. The impact of the prevailing environment on the economic wellbeing of lower- and middle-income consumers should bring shivers down our collective spine. Consumption is one of the important facets of GDP, and lower spending power for consumers would have a material impact on GDP growth expectations for SA.

State own goals

While we may believe the Bank should halt increasing interest rates, it is increasingly difficult to fortify any case for that route of action given the relative performance of the rand over the last few months. Recent events emanating from our supposed sale of arms and weapons to Russia, and the subsequent impact on the rand, have solidified the case for a 50-basis-point (bps) rate hike this week. This is but one action from the state that is to our economic peril. The state should recognise that persistent own goals are economically damaging, from Eskom and Transnet to #LadyRussiagate.

Reversing the course should not be the responsibility of the Bank, which in essence would be tantamount to attempting to control the currency. The weakness in the currency is the result of bad decisions by the state and should be left to the state to rectify. The Bank should be careful in responding to these kinds of shocks. The currency is an important input for inflation, but the Bank’s mandate is not currency control but price stability, and it should use its levers (interest rates) for their intended purpose.

Rand weakness is a supply-side shock on prices — through more expensive imports, on which SA is dependent. A saving grace in this respect has been the reversal of oil prices, which has compensated for the weaker rand. What may be described as cost-push forces on prices and operating margins encourage firms, for example, food manufacturers, to seek higher prices at the retail level that consumers then resist by buying less and trading down. This then discourages producers from hiring and investing in new plant and equipment. These forces make output growth less likely, a net negative for GDP growth.

Load-shedding is a further supply-side shock to the SA economy — it reduces output and incomes and constrains spending in addition to the negative impact of higher prices themselves on the willingness of households to spend more. If the Bank increases rates after today’s monetary policy committee (MPC) meeting, this will lead to an incremental increase in the cost of living for ordinary South Africans. Inflation has until recently primarily been driven by supply-side forces, particularly in SA where the income relief introduced in the face of the lockdowns was of a far smaller scale when compared to the extent of relief provided in the developed world in 2020-2021.

There has been no demand-side pressure on prices. Weak retail sales and supplies of bank credit indicate as much. Interest rates are a mechanism for influencing demand (consumption). Why hurt consumers more by hiking rates when demand isn’t the issue? The price of Brent crude peaked in June 2022. The broader basket of food and agricultural products peaked in October 2022.

This indicates that these higher prices have already turned lower, independent of central bank intervention. Inflation has already rolled over, but interest rates have yet to peak. Interest rates should be a leading indicator of inflation turning lower not a lagging one. Higher prices have their causes, but they also have the effect of depressing demand. Higher interest rates and slow growth in money and credit supplies have avoided further demand-side pressures on prices.

Incremental improvements to the operations of Eskom and Transnet would incrementally reduce the risk premium attached to SA, which would be positive for the currency. We cannot guarantee power and the flow of goods, and therefore cannot guarantee sustainable economic activity, GDP growth and tax revenues. Therefore, by continuing to hike interest rates an increasingly pronounced risk is engineered and there is self-inflicted destruction of demand, which hurts the economy as a whole, consumers and producers alike.

The Bank considers all these aspects in its interest-rate decision process, but the risks to the economic wellbeing of consumers are mounting. The supply-side shocks that have driven prices higher have abated. There is little demand-side pressure on prices. Demand is, if anything, too weak to sustain satisfactory growth. Circumstances have changed — partly because of insistent increases in interest rates imposed by central banks globally. It is time for central banks to recognise the new realities and to communicate these new insights to the marketplaces.

• Mazwai is investment strategist at Investec Wealth & Investment SA.