Borrowers hoping for some reprieve this year could be left disappointed, with markets now expecting interest rates to remain unchanged in 2024.
A big part of the work that central banks do involves meting out pain — carefully discerning how much economies can take before it becomes too much to bear. The tighter financial conditions become, the higher the risk is that something will break.
The United States has recently received a taste of the rupturing effects of an aggressive hiking cycle when three banks folded under the pressure of interest rates hitting a 15-year high. It remains to be seen whether the banking turmoil signals a full-blown economic crisis, but some in the US no doubt already feel as if they are living through a recession.
This element of their work — pinching just enough not to draw blood, sometimes failing — can make central bankers unpopular. Worse still is when a central bank’s bullying is barely worth the pain.
This week, the South African Federation of Trade Unions (Saftu) called for a picket against interest rate hikes. In a statement, Saftu likened the South African Reserve Bank to a madman “who hammers every problem because he sees it as a nail”.
Using interest rates to temper imported inflation is an exercise in futility, Saftu and others have said.
Reserve Bank governor Lesetja Kganyago has put the method of inflation targeting slightly differently. Kganyago has compared this policy to killing a snake that has crawled into your tent. “You don’t ask the snake where it has come from. You deal with the situation. You manage the snake at that particular point in time.”
Here’s the thing: the work of tackling inflation is also about creating the impression that you are willing to inflict pain, even if it ultimately doesn’t hit the right target.
After all, you’d appear just as much of a madman by knowingly sleeping in a tent full of snakes than you would by taking a thousand blows at one that is impervious to your bludgeoning. The problem with the latter, of course, is that each time you strike and miss the snake, you batter an economy already on its last legs.
Late last year, acclaimed economist Joseph Stiglitz took aim at the US Federal Reserve and other central banks for their unwavering determination to increase interest rates in the face of recession warnings. “Moreover, they openly acknowledge the pain their policies will cause, even if they don’t emphasise that it is the poor and marginalised, not their friends on Wall Street, who will bear the brunt of it,” Stiglitz wrote.
Pain, of course, is relative.
If, like many South Africans, you’ve lived with what might be described as chronic pain — a 15-year energy crisis, crumbling public services, an austerity budget, each having the effect of making you poorer — you might not cry out when you’re punched in the gut. The bungling government at the centre of our economic crisis, and which has led us to beg for mercy from the Reserve Bank, is counting on this.