Considering the latest inflation report, it might seem odd that economists are so divided on what the Reserve Bank will do when it wraps up its latest policy-making decision on Thursday. An inflation rate that’s almost a full percentage point below the lower end of the 3%-6% target range would seem to make for a compelling case for more rate cuts.
Advocates of quantitative easing, or money printing, will be left fuming at its lack of action. Since many of them were calling for QE in 2019 already, when inflation averaged exactly twice the 2.1% recorded in May, that should not come as a surprise.
Despite the low inflation reading, economists are toying with the possibility of the Bank leaving rates where they are, having already cut the repo rate by 275 basis points in 2020 so far.
Among 11 surveyed by Bloomberg, those expecting the Bank to match the 50-basis point cut delivered in May were a minority at three, with the rest equally divided between a 25-basis-point cut and no change. A similar survey by comparison platform Finder.com found that the majority of its respondents, 55%, expected no change, though this was conducted before Stats SA released the latest inflation data.
Unless there is a big surprise, we can be sure that the central bank won’t be winning any popularity contests at the end of the week.
In its defence, it is likely to point out that its job is not to look in the rear-view mirror and act in response to prior data. So it will be interesting to see what its forecasts for future inflation will be.
From May, it saw inflation averaging 4.4% for both 2021 and 2022, about where it wants it anchored. That forecast took into account predictions of the rate dipping below 3% in the second half of this year, so the May inflation reading would not in itself be reason for a policy change.
What’s not clear is whether it might be spooked by the number going all the way to 2% and what credence it gives to the data in the wake of the Covid-19 disruptions to data collection, which makes it hard to have a high degree of confidence in the data from month to month.
It may well be that South Africa is edging closer to the zero inflation rates that may justify more aggressive policy and even QE. But that would be a hard call to make for a forward-looking central bank. There isn’t an economist in the country who thinks South Africa is in danger of experiencing the sustained deflationary forces that prompted the experiment in developed countries.
But what would happen if we were to assume that this was a case and that, despite South Africa still having the highest real interest rates among big trading economies, the Bank had reached the so-called zero lower-bound interest rate where conventional policy ceases to be effective.
An argument, citing the Bank’s own research, can be made that South Africa is already there, at least as far as the majority of the country’s poorest people.
Would even looser policy from here, or even QE, where the Bank seeks to depress borrowing costs by buying bonds from commercial banks in the hope that they will then inject that extra liquidity into the economy, make a dent in the country’s poverty and inequality problem?
The Bank released a research paper earlier in July which argued that looser monetary policy almost exclusively benefited higher-income households who borrow through the formal sector and see the impact on the cost of servicing mortgages and other asset-backed debt such as car loans.
In contrast, the poorest 80% of the population tend to borrow through the informal sector and use forms of debt, such as store cards, that are more expensive and insensitive to changes in the repo rate.
It’s not a new argument. Bank governor Lesetja Kganyago made the same point in a speech two years ago when he said that, contrary to popular belief, lower interest rates worsen rather than alleviate inequality. This has also been consistent with criticism of QE in the West, mostly from those broadly regarded as coming from “the Left”.
The argument is simple enough. QE benefits those who hold assets — whether it be financial assets such as shares and bonds or physical property — to the detriment of the young who find themselves locked out of housing markets or pensioners who depend on annuities and other savings instruments that pay interest.
In his speech Kganyago argued that the negative impact would be even more acute in a country such as South Africa where the distribution of assets is even more skewed in favour of the rich. Curiously, that fact has not stopped QE in South Africa being a rallying cry for those who consider themselves to be on the Left of the policy spectrum.
Then there's the debate about how effective it would be in a depressed economy where banks are risk averse and will therefore be unlikely to use their bonanza from QE to go on an aggressive lending spree that boosts growth in any way. Other than lowering borrowing costs for the government, it's hard to make an argument for it.
But it’s clear when it comes to the country’s long-standing poverty and inequality, the central isn’t where to go for solutions. That doesn’t mean a heated debate isn’t coming.