Simon Segal
WITH South Africa’s inflation rate, down to 6,3 percent in October, at levels last seen in the early 1970s, much is being said about the economy entering a lower inflationary
Most economists (there are a few exceptions) see South Africa’s inflation rate remaining in single digits both next year and in 1997, averaging seven to nine percent in 1996 and a slightly higher eight to 9,5 percent in 1997. This year’s average should be around 8,6 percent compared to nine percent last year.
The falling rates on long-term bonds indicate that the bond market also believes lower inflation is here to stay.
The Reserve Bank’s primary motivation in maintaining relatively high real (inflation- adjusted) interest rates is more to do with concerns about the country’s foreign reserves than with inflationary pressures — although the Bank’s governor Chris Stals has built his reputation on being tough on inflation and is not about to relinquish his record of bringing it down.
His concern is that talk about a low inflation era is tempered by pressures on real wage increases, government spending, dwindling manufacturing capacity and M3 money supply growth which, despite falling to 14,8 percent in October, is well outside the Bank’s six to 10 percent target range for the year.
If this growth rate in M3 continues, M3 would end the year almost five percentage points above the upper limit of the target.
While less emphasis is being placed by the monetary authorities on money supply, Stals has said growth in credit extension to the private sector — 18 percent in September — should be under 12 percent before a cut in the Bank rate can be considered.
Finally, it can be argued that South Africa’s inflation, while low relative to the last two decades, is still high when compared to its major trading partners. Inflation is 1,8 percent in Germany, 3,2 percent in Britain, 2,8 percent in the United States and 0,2 percent in Japan.
For all these reasons Stals, ever cautious, is in no hurry to believe that lower inflation is sustainable and hence to reduce the Bank rate.
South Africa will have to live longer with high real interest rates. The real prime rate is now 12,2 percent compared to 4,45 percent in Germany, 4,55 percent in Britain, 5,95 percent in the US and 1,43 percent in Japan.
Economists are not even agreed that the next Bank rate move will be down. Some feel it could yet be raised further if inflationary pressures emerge and the capital flows into the country start to slow and put further pressure on the country’s reserves.
The real victory against inflation will be when inflationary expectations are snuffed out and will thus not be presented at wage negotiations and price setting meetings. Only then can one talk about a new era of low price
At present, there is still scepticism not only about the outlook for inflation but about the accuracy of the figures. Many consumers do not believe the figures.
While the basket comprising the index used to calculate the inflation rate might be outdated and thus not accurately reflect spending patterns, there is little evidence that the inflation figures are grossly inaccurate and that the trend it reflects is wrong.
However accurate the figures, perceptions are what count in economics — workers and managers are still linked in to a high-inflation mind-
This is a major reason why South Africa will not experience the inflation levels of its major trading partners for some time to come.