Reading the Reserve Bank's monetary policy committee (MPC) statement this week sent me flashbacks of sitting in a lecture hall in the Shepstone building of the then University of Natal, with a young and rather bright-eyed Adrian Saville waxing lyrical about the relationship between inflation and interest rates. I can almost hear him say: "When interest rates are lowered, more people are able to borrow more money, and that means more consumers have more money to spend, causing the economy to grow. Goods and services are in demand, and inflation increases. The opposite happens when interest rates rise. Consumers borrow less, the economy slows down, demand for goods and services slows and inflation decreases."
Back then, my friends and I could recite this in our sleep, notwithstanding that we had no clue what it meant. Until now.
Reserve Bank governor Lesetja Kganyago pretty much gave the same lecture when he announced that the medium-term inflation outlook is largely unchanged and, as a result, the MPC decided to hold interest rates in the hope of balancing inflation in the mid-range of the 3%-6% target for as long as possible, to help support growth.
"The MPC welcomes the sustained moderation in inflation outcomes and the fall in inflation expectations of about 1% since 2016. The committee would like to see inflation expectations also anchored closer to the midpoint of the inflation target range on a sustained basis," said Kganyago.
It is no small feat to have kept inflation this moderate for this long, in such uncertain times locally and globally. For us as South Africans, this is especially significant as the major drivers of our inflation are food, fuel and electricity, which will hit the poorer hardest if left to spiral.
In the past few years, SA has quite openly had the debate on what should guide the decisions of its central bank. On the one side is the current mandate of inflation targeting, and on the other have been calls for a broader mandate that goes "beyond price stability and must include growth and employment" - as the ANC lekgotla at the beginning of this year affirmed. In the interest of peace, I will ignore the "quantity easing" recommendations of the same lekgotla.
On a more serious note, though, if one understands the relationship between interest rates and inflation, one could argue that in many ways our central bank is already fulfilling this mandate.
If the economists are right, then using inflation expectations as the rudder for setting interest rates ought to have a direct impact on economic growth. By moving interest-rate targets up or down, Kganyago and company should be creating a conducive environment for economic activity. Business confidence should rise, consumers should get more credit and the economy should grow. This is the very reason some analysts hoped for a small cut as a shot in the arm for our unresponsive economy.
The employment bit of the ANC's wishful mandate is a little more complex, though. Unfortunately, it no longer follows that having economic growth means creating employment domestically. Thanks to the digital and open gig economy, skills are available anywhere in the world. Add to that the technological advancement of artificial intelligence and machine learning, and local companies can create tremendous value without the need for an army of employees. Those days are gone.
One thing is still true, though. No economic growth often leads to higher unemployment, so we should always pray for economic growth, even though it doesn't solve all our problems.
This article first appeared in the Business Times section of The Sunday Times on 22 September 2019.