EDITORIAL: Bank faces tough choice as power cuts and rand woes mount

Not long ago, economists expected the SA Reserve Bank to raise interest rates just 25 basis points and provide signals it was nearing the end of a punishing tightening cycle.

It would have meant the Bank is closer to victory in its 18-month battle against inflation and gave comfort to consumers chocking on an uncomfortably high household debt to-income ratio.  But the rand crashed to record lows, primarily pummelled by two factors.

First was the escalation in load-shedding in recent weeks that included gloomy expectations that businesses and consumers should brace themselves for worst-yet power cuts this winter. That is stage 8 load-shedding, or up to 16 hours of power cuts daily. Whether you are an ultrarich individual living in some of the country’s wealthiest suburbs or a blue-chip company with cash to burn, 16 hours is a long time.

The other reason behind the rand’s collapse is SA’s foreign policy blunders. About two weeks ago, top US diplomat Reuben Brigety made explosive allegations in a news conference that a Russian ship, the Lady R, had picked up weapons at Simon’s Town Naval Base near Cape Town.

The immediate worry among those watching at home is that SA could be cut off from lucrative trade deals under the African Growth and Opportunity Act, an outcome that would undermine the economics of huge export-orientated sectors such as the motor industry, and pile even more pressure on the rand. 

Admittedly, Brigety has apologised for his public outburst, and the SA government has moved swiftly to deny that it supplied ammunition to Russia as part of what seems like unsuccessful efforts to reaffirm its official position on Russia’s invasion of Ukraine as being neutral. But perception, as are actions, is everything in the market: the rand was trading at about 19.20 to the dollar in late afternoon deals on Tuesday, not far from the unprecedented levels reached after the news broke two weeks ago. 

You will not only see the consequences of this toxic mixture of load-shedding and a weaker rand on the pace of SA’s economic growth but also on its price stability. Retailers such as Pick n Pay and food manufacturers such as Astral have already warned that they will have to pass on the extra costs of running diesel generators and wastage to consumers.

A weaker rand makes imports more expensive, increasing the risk of inflation expectations becoming unanchored, which would make it harder for the Bank to achieve its inflation target of 3%-6%.

The Bank cannot afford to ignore these inflationary pressures, especially as they come while global monetary policy is tightening. A 50-basis point interest rate hike on Thursday, as widely expected by economists, will sting — but it will help anchor inflation expectations at 4.5%. Well-anchored inflation expectations are widely considered to be a reflection of credible monetary policy.

We acknowledge that raising interest rates in a weak economy is a difficult decision but the alternative of letting inflation spiral out of control would be even worse in the long run. The Bank has little choice.