Reserve Bank has no choice but to stick to its guns

Inflation outcomes surprised on the upside for two consecutive months, to my disappointment and I am sure that of everyone who forecasts inflation. The pain would have been worse for the Reserve Bank, which has the thankless task of bringing inflation down to 4.5%, or 3% if governor Lesetja Kganyago and his lieutenants could make their own cake to eat.

As far as the Bank is concerned, it's more than a disappointment; it is a policy headache having to face stubbornly high inflation, low economic growth and policymakers elsewhere in government who at the very least do little and at most do the opposite of what is required to stabilise the macroeconomic environment.

Policy, politics, profits and people are on the line, and monetary policy has a disproportionate share of saving everyone from the consequences of political indecision, wrong policy decisions, profiteering and rent-seeking behaviour that continue to send the economy into the abyss.    

Let me begin with what we are facing and what it means.

Inflation is a serious national and global subject, especially when it is high and persistent as it is now. It affects the downtrodden, who pay ever-higher prices for necessities such as food and transport with limited sources of income. Inflation also hurts the elite and big businesses that trade in fixed-interest securities such as bonds because their real return is reduced significantly.

And for small business owners, the lack of bargaining power when sourcing inputs from suppliers means they often have to  close shop because they are no longer competitive. The point is that no-one wins when inflation is high, unpredictable and persistent.

Before questions emerge let me deal with an old narrative about inflation from the labour unions. They have long advanced a view that an emerging market economy such as South Africa can have slightly higher inflation without affecting economic growth; thus the central bank does not need to hike interest rates to drive inflation lower. So the argument goes.

The recent strikes and public complaints about the high cost of living, essentially meaning high inflation, invalidate that narrative as opportunistic or, worse, dishonest. None of the usual views that slightly high inflation is good are present. So, I consider this argument dead and buried and I hope society is never misled again on why high inflation can be tolerated.

Back to the devil on our shores. Annual inflation for March printed 7.1%, up from 7%. It was an upside surprise relative to the 6.9% market expectations. The February print was also an unpleasant upside surprise from 6.9% and against expectations of 6.8%. Core inflation surprised on the upside in February at 5.2% from 4.9% and relative to market expectations of 5%.

The only positive in the March print is that core inflation was stable at 5.2%, which means the underlying inflation in the economy remained stable though the volatile components accelerated. This can be one of the few reasons the Bank might wait and see where inflation goes from here. The hurdle for this is very high.

What does the Bank do in this environment?

Growth forecasts are decimal points higher than zero, which means everyone agrees the economy is stagnating. This is the first true post-Covid-19 year, with a lot still to normalise. Decimal points accuracy in economic forecasts is hubris as there are many measurement errors and changes in seasonal factors. Thus, there is no practical difference between 0.2 and -0.2%. Given load-shedding, logistics constraints and lack of political willingness to implement reforms faster, the big picture is there is no growth and the risk of a recession is going up.

Former US Fed chair Paul Volcker is remembered for having killed inflation in the 1980s. I think the Bank's monetary policy committee (MPC) will want to be remembered for having had the foresight to see inflation was not transitory and having acted early enough to bring it back to the target range.

Will they consider the political ramifications of hiking interest rates, if any?

I don't think they should, because far worse political consequences arise from very high inflation. Should they consider no growth or recession? Yes, but it should not dissuade them from bringing inflation down because low growth will be there even if interest rates were not going up.

The Bank’s role is onerous but when it's achieved its goal no-one will say thank you, so it must just go ahead and act as it needs to.