Fresh from his reappointment as Reserve Bank governor, Lesetja Kganyago gave the nation a piece of welcome good news when he announced that the monetary policy committee (MPC) had unanimously resolved to cut the repo rate by 25 basis points, easing pressure on a very stretched consumer. Many may have expected the political spotlight that's been on the Bank in recent times to affect Kganyago and his MPC. It was not to be. If anything, Kganyago took the opportunity to make it clear that although the outcome is a rate cut, which many have been begging for, the rationale remains inflation targeting.
"Monetary policy actions will continue to focus on anchoring inflation expectations near the mid-point of the inflation target range in the interest of balanced and sustainable growth. In this persistently uncertain environment, future policy decisions will continue to be highly data-dependent, sensitive to the assessment of the balance of risks to the outlook, and will seek to look through temporary price shocks." In layman's language: we will continue to make our monetary policy decision on the basis of inflation targeting and actual data — not political rhetoric. So get off my back and let me do my job!
WE WILL MAKE OUR MONETARY POLICY DECISION ON THE BASIS OF INFLATION TARGETING AND ACTUAL DATA
When one considers that inflation has reduced by a whole percentage point since 2016, and has remained in the midpoint of the 3-6% range for a while now, a cut was almost inevitable. However, for those who hoped for more than what we got, perhaps this is a reminder that Reserve Bank governors are not ice-cream salesmen — they are not here to make everyone happy. They are here to make the best decisions for our country, with the best information available to them.
The general economic theory around interest rates and growth goes as follows: when interest rates are lowered, more people are able to borrow more money. That means consumers have more money to spend, causing the economy to grow and inflation to increase.
Which takes me to the single-biggest challenge of our time: slow economic growth.
The first quarter of this year delivered a 3.2% decline — apparently the biggest in a decade. The reasons cited by those in the know are Eskom, strikes, slow consumer spend and investment. The hope now is that this cut in interest rates will ignite some economic activity, and that should translate into GDP growth. There is also talk that the mining and manufacturing numbers are looking on the up, and we haven't had too many negative Eskom headlines of late. There is hope.
However, all this can be undermined if we do not play our part in bringing back investor and consumer confidence. Experts say that the cheapest form of economic stimulus is confidence. Judging by the headlines and sound bites that consume us daily, we are failing to sustain a positive outlook in ourselves. The "new dawn" and spirit of "thuma mina" feel like a distant memory nowadays. We need to find a way to bring them back and stop the own goals and shots in the foot.
The MPC statement leaves two stark realities we still need to contend with before we can feel that Ramaphoria again.
First, the Reserve Bank has almost halved its 2019 GDP growth forecast, from 1% in May to 0.6%. Second, it has warned against the impact of the debt we need to raise to fund our state-owned enterprises — most notably Eskom. This basically means we have yet another year of no economic growth, and we must somehow find money to keep the lights on and, in the process, create jobs.
Kwanzima! (It's hard).
This article first appeared in the Business Times section of The Sunday Times on 21 July 2019.