SA’s new deputy finance minister is right: Interest rates should be lower
- Deputy finance minister David Masondo apparently believes the Reserve Bank should have cut interest rates months ago.
- He questions whether current rates are supporting growth.
- The repo rate is on track to be cut in two weeks' time. More cuts should follow.
- For more stories, go to Business Insider SA.
South Africa’s new deputy finance minister believes interest rates should have been cut months ago, judging from an interview this week.
David Masondo told Business Day the fierce debate in the ANC over the independence of the SA Reserve Bank is misguided – the real issue is whether interest rates over the past few months have been set at the right level
"The key issue for me is whether the interest rates are high. For instance, do the levels of interest rates ease access to credit by the private sector [business and households], mainly to support the government-stated objectives of promoting black-owned businesses, properties and the growth of small and medium enterprises in general?"
He cites figures that show loans to businesses have plummeted in recent years, with growth in credit extension halving from more than 15% (1994 to 2008) to 7.5% (2010 to 2017).
The high interest rates have also contributed to big pressure on consumers, and house prices:
The monetary policy committee of the Reserve Bank has been hawkish in recent years, with seven hikes since the end of 2013 – despite South Africa sinking ever deeper into trouble. After a painful recession last year, the economy shrank by more than 3% in the first quarter of 2019 - as loadshedding and a dire lack of investment hit growth.
Still, the bank has not budged on rates.
This is also despite inflation staying below the upper end of the Reserve Bank’s 6% target for more than two years. But Governor Lesetja Kganyago wants inflation to be at 4.5% to allow flexibility to deal with unexpected shocks.
Meanwhile, the Reserve Bank's own forecasts have overestimated inflation as weaker labour costs and lower food prices have persisted for longer than anticipated, according to a report by Momentum Investments.
While the market's expectations for inflation over the next two years have continued to decline, the repo rate just went up.
Masondo told Business Day that the central bank's current mandate — "to protect the value of the currency [of the Republic] in the interest .. of balanced and sustainable economic growth" — does not imply a narrow focus on the inflation target.
"The mandate is not to protect the value [purchasing power] of the currency for the fun of it, but to protect it in the interest of balanced and sustainable economic growth, which in my view, includes employment and income distribution.
"The current monetary policy test is: at any point in time, is the stance of monetary policy commensurate with "balanced and sustainable economic growth?"
Little threat to debt and the rand
With inflation (currently 4.5%) seemingly under control, some of the other traditional concerns about too-low interest rates can also be safely disregarded.
Lower interest rates won't fuel a dangerous debt situation - households do not look particularly overindebted by historical standards:
Another worry is the rand: lower interest rates mean that foreigners holding rands will earn a smaller return. They may look elsewhere for better yields.
They will have to look very hard though: South African interest rates look solid compared to elsewhere. The local repo rate (6.75%) is still higher than in many other countries, including Brazil (6.50%), India (5.75%), Philippines (4.50%), Chile (2.50%), Thailand (1.75%), the UK (0.75%) and Australia (1.00%). The US central bank also looks on track to cut its main rate (2.50%) soon.
Local government bonds are also still looking attractive.
Sometimes its nice to benefit when the rest of the world is in a mess. With negative yields everywhere you look and Austria about to issue a 100 yr bond that yields 1%, all of a sudden our SA 10 year at 8.06% doesn't look too bad. Rand running off the back off it now at 13.96$?? pic.twitter.com/CqwsNvPOOt— Nick Kunze (@NickKunze2) July 4, 2019
It now looks as if a rate cut in two weeks' time is inevitable. More should follow.
Receive a single WhatsApp every morning with all our latest news: click here.
Also from Business Insider South Africa:
- Sexy Socks versus Woolworths: This is what happens when your customers stop trusting you
- A viral video shows a woman licking a tub of ice cream then putting it back in the supermarket freezer, and the brand has teamed up with police to try to track her down
- Who is Christine Lagarde? The woman who rolled her eyes at Ivanka Trump is now set to take Europe's most important monetary position
- Iran's president trolls nuclear deal signatories after breaching uranium stockpile limit: 'If you want to express regret and issue a statement, you can do it now'
- Boris Johnson's links to soft drinks and tobacco lobbyists revealed after he announces review of 'sin taxes'