There is a lot of talk about the role and the mandate of the SA Reserve Bank and emotions seem to rise when the economy is in a rut and solutions prove elusive.
Critiques of the bank are plentiful but orchestrated reaction and co-ordinated attacks ring hollow when fiscal policy, or the lack thereof, is ignored.
Fiscal policy impacts monetary policy transmission channels both directly and indirectly.
Both these channels influence aggregate demand conditions within the economy. Demand conditions in turn tend to influence wage and price-setting behaviour and that is how fiscal policy can affect inflation and inflationary expectations.
Unsustainable fiscal policy is likely to reduce the credibility of a government’s commitment to direct monetary policy towards price stability. In turn, this reduction in credibility will raise long-term inflation expectations and increase the costs of pursuing an anti-inflationary monetary policy.
In hindsight, I do think that the Reserve Bank could have been less conservative when it kept interest rates relatively high from 2017 onwards.
Inflationary pressures were subsiding, which gave room for it to respond accordingly. My concern is less about the bank and more about those who are entrusted to deliver services such as water and sanitation, infrastructure, health and education and those responsible for the implementation of policy that would have reduced unemployment, inequality and poverty.
This is because the transmission mechanism of a rate cut is limited by the level of poverty and inequality. Given the structural problems faced by the South African economy, a rate cut largely benefits those individuals and corporates that are leveraged.
They are the ones that received messages from their banks alerting them that the interest on their loans have declined and they are often encouraged take on more debt to provide them with a buffer during these trying times. The majority of South Africans are not impacted by the 275-basis point cut in interest rates this year simply because they are poor, and the system has failed them.
GDP growth has been stifled by bad policies or the lack thereof and as such, has remained low for some time. A road map called the NDP was put together in 2012 to put us on course to achieving sustained growth, but the implementation of that plan has largely stalled.
Economically, we are in a precarious position, and not because of the Reserve Bank’s inaction, but because of a non-existent fiscal policy, which has impacted on our fiscal credibility, the failure to implement growth-inducing policies and the ineptitude to deliver basic services.