South African Reserve Bank (SARB) Governor Tito Mboweni said on Thursday that while he thought South Africa’s interest rates were too high, the sociology of the previous lower rate environment meant he had to raise rates to control inflation.
He said the combination of household debt, loans and advances to the private sector, house-price growth and retail sales had meant that South Africa was
beginning to have an unbalanced economy because of too much demand.
“Since September 2003 we have been lucky enough in South Africa that inflation has been within the target band of 6% to 3%. I say 6% to 3% and not 3% to 6% because this indicates a declining trend. That situation had allowed us to provide sufficient monetary accommodation in SA economy by lowering interest rates.”
However he said that the low-rate environment had caused “conspicuous consumption”.
“We had not properly anticipated or priced in the sociology of interest rate reductions — economics is about human behaviour — and the sociology of the lower interest rate environment was that for the bulk of the population the experience of these interest rates was unknown — they went and bought a second
or third car, five DVD systems, ten handbags, three or four houses — they went on a spending spree such that loans and advances to the private sector was at 23% in June and then rose to 34,6% in July,” said Mboweni.
“The household debt as percentage of household income has also risen to about 68%. Retail sales have been running at rates never seen before,” he added.
Mboweni said this resulted in an unbalanced economy because of too much demand.
“Growth in house prices went as high as 30% at one stage and property developers began to have a party and people for some strange reason became willing to pay exorbitant prices for houses from borrowings,” said Mboweni.
He said most South Africans were not used to living in such a low inflation rate environment, but added that he thought rates were actually too high.
“I still think SA interest rates are high — but the sociology mentioned above doesn’t permit me to go any lower than I want to,” said Mboweni.
“Our rates are still high in relation to some other developing countries,” he added. – I-Net Bridge