The argument about whether Reserve Bank Governor Tito Mboweni’s half a percentage point rate cut was justified, or whether he was pushed politically, misses the point (Market Buzz, August 20).
Monetary policy, used in isolation from other economic measures, is a blunt instrument. Monetary policy can work against inflation, but its side effects can be almost as bad as the original problem.
In the early 1980s then-governor of the United States Federal Reserve Board Paul Volcker drove up interest rates to get a grip on double-digit inflation resulting from the Vietnam War. The medicine worked, but drove the dollar up to unsustainable levels in the long term, and in the short term crippled exports and fuelled imports.
If monetary policy is used to control inflation, it needs to be coupled with non-monetary measures. Possibilities in South Africa include further exchange control relaxations, or even a special tax on foreign deposits in the banking system, adopted by the Swiss in the 1970s. An additional possibility, recently mooted, is the imposition of a loan levy on taxpayers to withdraw money from circulation.
Another economic phenomenon not easily handled by monetary policy is “stagflation” — low growth coupled with high inflation. This was “the British disease” under the Labour Party government of the 1970s.
As South Africa has also found, high interest rates can coexist with aggressive union action to drive wages above the inflation rate. The government, as an employer, has a role in moderating pay claims, especially if public service wage settlements give the lead to parastatals. “Cost-push” inflation, driven by excessive negotiated pay settlements, works to the detriment of society’s most vulnerable.
Monetary measures make for a more efficient and compassionate policy mix when used in conjunction with other economic tools, including taxation and labour policies. So Mboweni should not be blamed if his monetary policy, used in isolation, hurts the economy.