`ACT in haste, repent at leisure” is not an adage one can throw at the Reserve Bank, or its governor Chris Stals. His inaction, when South Africa is crying out for a well- deserved cut in interest rates to put the economy back on a firmer growth path, is nothing short of unpardonable.
Instead of railing at labour’s intransigence, the bank should consider how its own policies are hampering employment creation, particularly in the small business sector, which has been targeted by government as a potential engine of growth. Leaving aside the issue of whether a central bank should involve itself in matters of employment policy, the question remains as to whose interests are being served. Not the government’s, which depends on the success of its macro-economic growth strategy to underpin its credibility; nor industry’s, which cannot afford to invest in much-needed capital expansion. And all the while, speculators in the financial markets are having a field day.
The bank would no doubt point to consistently high inflation and consumer credit growth to justify its tight monetary policy. South Africa’s record on both counts is very poor. But statistics released this week put the consumer price index down a touch to 9,5% in May, while credit is definitely on a downward trend, albeit still way out of the bank’s target 12% growth rates.
The interest-rate squeeze is taking effect: consumers are no longer spending indiscriminately; house prices are down; furniture and white goods gather dust in the stores; cars are no longer moving rapidly off the showroom floor.
The danger now is that the bank will wait too long and miss the boat. Monetary policy works with significant lag periods; waiting until credit expansion has hit the magic 12% before loosening the monetary reins will be too late. By then the economy will be firmly on the road to recession.
Two of the country’s biggest banks agree: this week, Absa and Standard dropped their mortgage rates. The move will have little effect outside the banks’ own network of customers as mortgages are difficult and costly to transfer for the sake of a few percentage points but the principle is important. And because a rate cut is not easily reversed, it is a vote of confidence – one that should have come from the Reserve Bank. The banks obviously believe next week’s changes in exchange control legislation will not result in destabilising volatility in the markets, plus they are taking the view that the only feasible direction for interest rates is down.
Pity the Reserve Bank has not yet caught up. It is still basing its policies on circumstances pertaining to a siege economy, using high interest rates to suck in foreign capital at the expense of economic growth. Events of the past year should have proven beyond reasonable doubt that foreign capital is fickle, but South Africa’s economic problems are here to stay unless the bank acts – now.