Can South Africa survive more interest rate hikes?

Michael Jordaan, the chair of Bank Zero, gives us his thoughts around the inflation picture.

Listen to the podcast here:

JIMMY MOYAHA: We have had a couple of announcements this week. We had a look at interest rate decisions earlier today, we’ve had a look at the announcements from the Bank of England, the US Fed, and all of this points to the fact that we know we are having our interest rate conversation next week. Our Monetary Policy Committee [MPC] will meet from next week, Tuesday to Thursday, and they’ll render their decision on March 30. So this time next week we should have an announcement around our interest rates.

Just to look ahead to that I’m joined on the line by the chair of Bank Zero – not the former CEO of FNB [which he is] – Michael Jordaan. Thank you so much, Michael, for your time.

I guess the starting point of the conversation is what do you make of the current state of the South African economy where we are sitting at the moment?

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MICHAEL JORDAAN: We are in a very, very bad state because of load shedding.

JIMMY MOYAHA: Don’t say that Michael.

MICHAEL JORDAAN: Well, I’m the most positive person you can speak to, but you’ve got to face the facts. Energy is just such a key part of the modern world. It’s not just driving the car or keeping the lights on – it’s every single manufacturing process. It’s agriculture, it’s mining. And if you don’t have electricity, and you don’t have abundant electricity, that is really going to hit hard.

The IMF [International Monetary Fund] has said we will hardly grow this year. That’s a problem when you have a population growth rate of 1.3%. I suppose the frustration is that it is completely [possible for us] to grow at 5% a year for the next 20 years.

We could transform what South Africa is, we could become a modern, I don’t know, Singapore or Vietnam. We could grow at much higher rates, but it takes some tough decisions.

Eskom is a terrible story – that for 10 years we haven’t made the right decisions in the long run, and now unfortunately we are paying the price.

JIMMY MOYAHA: Yes, let’s look into that – paying the price. The MPC meeting is coming up next week. Is a rate hike all but certain at this stage, is it something that is basically a foregone conclusion?

MICHAEL JORDAAN: I think at this stage we are taking our lead from the Fed and from other developed markets.

So the fact that we had this 25-basis-point increase announced by the Fed, as well as some big increases that we’ve seen in Europe, will definitely play a role, plus the fact that inflation recently shot up to just below 7%, and food inflation is just below 14%.

Now inflation is a terrible thing. It’s ultimately a tax on the poor. You’ve got to remember that.

Maybe one day we’ll find a better way to control inflation than increasing interest rates, but at the moment it’s the one that the economists have found the best instrument.

The Reserve Bank is likely to raise interest rates by another 25 basis points – as I say, in lockstep with the Fed on the one side, but on the other hand we still have some real inflation issues here in South Africa, and they’ll be fighting that.

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JIMMY MOYAHA: So then should we be doing that, Michael? Should inflation-targeting still be used as an appropriate method, given that we know that our central bankers wanted to keep inflation targeting between 3% and 6%? Is it the right thing for a developing economy to be benchmarking against a developed economy, considering something like the fact that the US pumped in as much as they have in terms of a stimulus package during Covid; they’ve put in place measures to stabilise their economy and ensure economic growth.

South Africa hasn’t done anything of that sort. Should we then be benchmarking our rate-hiking cycle [against] countries that have done more to boost their economies?

MICHAEL JORDAAN: I think the benchmarking is one [thing] that has an impact on the exchange rate.

So if those developed countries, the hard currency countries, increase their interest rates and we don’t, you’re going to see our currency weaken, and that [weakening] in itself will feed through to inflation. That’s the one argument.

But even if we weren’t to bother about what’s happening in the outside world, inflation is a very real issue in South Africa and the risk, of course, is that it can become structurally higher, and it becomes structurally higher when inflation expectations are increased too much.

That is the risk that the South African Reserve Bank and in fact any central bank faces – that their action is seen as being too light on increasing interest rates. And then, once inflation sets in it takes a lot more to get rid of it. So I think they are essentially steering the right course.

Your question does [interrogate] whether we [should] have done more during the crisis, and the unfortunate thing is that, yes, there’s a lot that one could do – but it does start with the basics.

I just want to come back to Eskom. ‘The basics’ is power.

If you don’t have power, you don’t have confidence, and confidence arguably is the cheapest form of stimulus that can be applied in any economy.

JIMMY MOYAHA: We’ve seen the central bank also talk about the inflation picture or the interest-rate hiking cycle as ‘we have to bear this short-term pain to ensure long-term stability’ etc. And that’s been the rhetoric from a lot of central banks, ours in particular. But what we’ve seldom seen is central banks actually cutting rates.

I guess the question then becomes if we continue on this rate hiking cycle, we then manage to stabilise inflation, we get it back to the targeted band and everything – do we anticipate that the central bank will cut rates? Or will they just keep them at these elevated levels because it’s something we would’ve [become] used to at that point. And if we do expect the rate cuts, can we expect them any time soon? Or is it still very far down the road?

MICHAEL JORDAAN: Look, if inflation comes down we’ll get rate cuts. That’s what the central banks do.

And in fact we’ve actually come off a period of very, very low rates internationally. People call it ‘zirp’, which is ‘zero interest-rate policy’.

Since 2008 the reference rates of the Fed in America [and] the ECB [European Central Bank] have been close to zero. In some cases we’ve even had negative interest rates. So they do cut rates.

Our rates have been, in historical terms, incredibly low for a very long time, from 2008 until about a year ago. So yes, rates will come down, and they’ll come down when inflation comes down.

Economists have all these different charts that show when it’ll happen.

I do believe expectations add a lot to that because if your employees start building in high inflation expectations, that becomes a self-fulfilling prophecy. That’s the one thing they’re very worried about.

And then the other one – and I hate to do this again – comes back to power. If the power doesn’t work, the cost of everything goes up. People have to back up power with generators and so on. Or if factories can’t optimise their output or people can’t get to work because trains aren’t running, or whatever it is, that just pushes up inflation.

You ask me when it’ll come down; it’ll come down when the supply factors in the economy are such that prices will be softer again, and then rates will come down.

I wish I could tell you it’s soon, but I think we need to get through the electricity crisis before I can say that with confidence.

JIMMY MOYAHA: Well, let’s be realistic about this factor then. The fourth quarter GDP numbers came in down 1.2%. You mentioned earlier, of course, the population is growing at 1.3%, which means our economy is growing more slowly than our population – which is never a good sign – and we’re about to have a rate hike next week. Can we reasonably afford to keep on [with] such elevated rate-hiking cycles, or is this the tipping point that sort of starts us down the very dark path that’s known as a recession?

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MICHAEL JORDAAN: I would like to say that while there is a lot of focus on interest rate policy, because people go into a hall and make a decision and it gets announced and it affects everything, that is but one of many, many tools that we have in our arsenal to make the economy grow.

Others would be the good functioning of our courts, for example, or whether contracts are enforced, or whether there’s corruption in the economy and whether crime is under control, and whether there’s an electricity supply and whether the roads don’t have potholes.

So I would first of all say that we should try to avoid a recession at all cost. But it’s not through interest rate policy. It should be through many, many other policies where we actually haven’t performed that well as South Africa, unfortunately.

So it’s fiscal policy, it’s government policy, it’s pro-growth policies. I come back to the point I made earlier – it’s completely in our power as South Africa to grow at 5% a year. We’ve just got to take some hard decisions.

These aren’t magical things, these are things other countries in the world have done. We can study them and we can repeat them in South Africa, and I wish we would do that, rather than just think it’s as easy as reducing interest rates.

JIMMY MOYAHA: Our problems are many, but they are solvable problems. That’s what Michael Jordaan is saying. Thank you Michael. That’s all we have time for.

We’re sitting with the interest rate picture that we’re looking at as we head towards our MPC meeting next week, and the fact that we can definitely make this work as a country.

We just all need to get the tough decisions out of the way – well, not all of us, members of parliament, I suppose – and we need to all work together to make sure that those decisions are implemented.

This article originally appeared on Moneyweb and was republished with permission. Read the original article here.