Zuma to tackle rates 'problem'

[lsuacner]

http://www.fin24.co.za/articles/default/display_article.aspx?Nav=ns&ArticleID=1518-25_2242865

Johannesburg - Jacob Zuma, the newly elected leader of South Africa's ruling African National Congress (ANC) said on Sunday that he would look at inflation targeting, a key monetary policy tool used by the Central Bank to reign in inflation.

SA adopted the policy in 2000 as a framework through which the central bank estimates, and makes public, a "target" inflation rate then aims to steer actual inflation towards the target by increasing or decreasing interest rates.

"Clearly, our main method of inflation targeting, which is hiking the interest rate, has resulted in complaints from both the top end of the financial spectrum as well as the bottom end," The Sunday Independent newspaper reported Zuma as saying.

"So it stands to reason that there's some kind of "problem" there. And though I am not going to pretend that I have delved into the issue properly, it is something that I am going to get to," Zuma said.

SA's central bank has raised repo rates by a total of 400 basis points since June last year to tame rising inflation pressures.

Criticism

Critics say the main drivers of accelerating inflation are food and fuel costs largely outside the control of monetary policy.

In his first speech to delegates at a congress that saw him elected as the president of the party, ousting State President Thabo Mbeki, Zuma, who was supported by trade unions and the communist party, moved to calm fears that there would be a shift in economic policies.

The powerful trade unions and the communist party have criticised the central bank's determination to tame inflation through interest rates, and have demanded the removal of inflation targets.

However, Central Bank governor Tito Mboweni said in November that keeping inflation low was the best way to help the poor, with price increases affecting them more acutely than the rich.

Mboweni said economic policy, including inflation targeting, was unlikely to change even if there was a change of leadership within the ruling ANC and country.

Zuma has almost no schooling. Mbeki and the rest advanced their education while in exile and Mbeki has a degree in economics, Zuma made babies but wishes to determine monetary policy?

 

[Fudzy]

What does this have to do with his level of education? I'm sure he wont be heading up the inquest himself.

 

[supersunbird]

If the "educated" clowns blame consumer spending with borrowed money (lots of which cant be helped largely due to rising fuel and food prices) for increased inflasion and thus that we need to raise rates (which is foolish), why cant we "uneducated" clown a chance?

 

[Syndyre]

Zuma has almost no schooling. Mbeki and the rest advanced their education while in exile and Mbeki has a degree in economics, Zuma made babies but wishes to determine monetary policy?

We can only hope he surrounds himself with experts and listens to their advice. Zuma getting directly involved in monetary policy will make the markets rather nervous, especially as the Reserve Bank's supposed to be independent.

 

[noxibox]

Firstly what evidence is there that inflation control through interest rates really works? Secondly what evidence is there that it really works in our economy?

The fact that Mbeki has a degree in economics does not mean much. There are as many opinions on economics as there are economists. Even many of the economists who were saying the reserve bank must raise interest rates, only so that the reserve bank could be seen to be doing something, expressed strong doubts as to whether raising interest rates would make any difference.

Mboweni has been questioned in parliament as to whether there are not other, perhaps better ways, to tackle or deal with inflation. His response was simply that his only tool was interest rates - an everything is a nail situation.

Do we perhaps have to be more flexible on inflation? In other words keep an eye on it, but not attempt to keep it within a rigid band. Is inflation higher than the target band perhaps something we have to be willing to accept to drive more rapid growth?

If it is true that the reserve bank has been buying up Dollars thereby maintaining the exchange rate as the Dollar weakened, then they are directly responsible for driving inflation. We already know they were lying when they claimed debt levels in South Africa were excessive.

The situation definitely requires some scrutiny. I hope he gets some good people looking at this.

 

[Claymore]

Firstly what evidence is there that inflation control through interest rates really works? Secondly what evidence is there that it really works in our economy?

It certainly does work, but it is a very blunt tool. The problem is that it's really the only tool the Reserve Bank has. The finance ministry has other tools, like government expenditure, taxation, etc., but they have their limitations too, especially with respect to interest rates.

 

[lsuacner]

I would want an official who can draw a demand and supply curve and who can tell me who Adam Smith and Keynes is, rather than an educated former terrorist deciding on monetary policy. No matter how brilliant you are (and I don't assume Zuma is a genius) you need to know the basics of economic theory to decide on monetary policy.

 

[noxibox]

We can only hope he surrounds himself with experts and listens to their advice. Zuma getting directly involved in monetary policy will make the markets rather nervous, especially as the Reserve Bank's supposed to be independent.

I'd get very worried if he was directly involved. If he takes good advice from experts, then he is a smart man. He does need to get people who are not blinded by simplistic approaches.

If the "educated" clowns blame consumer spending with borrowed money (lots of which cant be helped largely due to rising fuel and food prices) for increased inflasion and thus that we need to raise rates (which is foolish), why cant we "uneducated" clown a chance?

There is absolutely nothing wrong with consumption on credit, although it should not be to pay for things like fuel and food. Most people were not borrowing beyond their means to repay, until the reserve bank increased rates by more than 50%. The current situation is probably hurting the poor more than anyone else - inflation remains high and higher interest rates will probably drive up other expenses like rent. Small business owners are complaining that interest rates are squeezing them - they naturally have to raise their prices to compensate for the higher interest rates, but of course they will face resistance from customers.

Cheap credit was pushing demand up faster than supply. So a case could be made for raising rates to slow demand, but that has to be combined with measures to accelerate the increase in supply, with the aim to bring rates down again as soon as possible. You cannot just keep increasing the interest rate. You also have to worry about crushing growth or even pushing the economy into recession. Mboweni has almost as much as said that's not his problem.

We also know that a good chunk of credit was going to businesses. We want people borrowing money to grow their business.

 

[Syndyre]

I would want an official who can draw a demand and supply curve and who can tell me who Adam Smith and Keynes is, rather than an educated former terrorist deciding on monetary policy. No matter how brilliant you are (and I don't assume Zuma is a genius) you need to know the basics of economic theory to decide on monetary policy.

Exactly. If he defers to experts it'll be ok but will he?

 

[Syndyre]

I'd get very worried if he was directly involved. If he takes good advice from experts, then he is a smart man. He does need to get people who are not blinded by simplistic approaches.

The problem is he owe people like COSATU, the SACP etc. who want populist measures that won't benefit the economy but are expected by their supporters.

 

[Nick333]

All that raising the interest rate will do in the present climate is create more poor people. Lower and middle income people who are already feeling the pinch from increasing food and fuel prices will be struggling to pay their debt now too.

At least Zuma is aware of the issues affecting the man on the street which is more than could be said of Mbeki.

 

[ironrod]

Zuma seems to me, as a person who would consult more than Mbeki, so would be a better President.

 

[Syndyre]

Zuma seems to me, as a person who would consult more than Mbeki, so would be a better President.

Depends who he consults though.

 

[noxibox]

It certainly does work, but it is a very blunt tool.

There are differing opinions on how effective it really is. Some economists have expressed the opinion that interest rates merely appear to be the cause of inflation reduction.

Of course the inflation rate going down is not proof that raising interest rates works.

The problem is that it's really the only tool the Reserve Bank has.

That is why it is time to have someone evaluate the situation. It may be time to remove the inflation target band to prevent the reserve bank from continuing to apply their hammer. Or peg a maximum repo rate. Recent statements by Mboweni seem to indicate he'd just keep raising the interest rate indefinitely if inflation refuses to come down. What happens if it stabilises, which may have nothing to do with the interest rate either, but stubbornly remains at say 8%?

I would want an official who can draw a demand and supply curve and who can tell me who Adam Smith and Keynes is

There are many economic theories. The IMF and World Bank have generously proven to us how dismally some of them fail when blindly applied.

South Africa needs growth. We need to achieve growth rates that dwarf the best we have achieved so far.

Growth, not interest-rate hikes

 

[noxibox]

All that raising the interest rate will do in the present climate is create more poor people. Lower and middle income people who are already feeling the pinch from increasing food and fuel prices will be struggling to pay their debt now too.

And they're actually likely to grow their debt in a short-term attempt to deal with the situation. If they cannot get these loans from officially sanctioned sources it will come from even less scrupulous sources.

If you have money the increased interest rates are an annoyance, but they won't destroy you. It just reduces the money available to create more money.

At least Zuma is aware of the issues affecting the man on the street which is more than could be said of Mbeki.

To me Mbeki appeared to be an ivory tower intellectual who was not just out of touch with the reality of the typical South African citizen, but also obsessed with going down in history for great global achievements.

 

[sand_man]

Well we seem to be digressing from the original point of this thread which was to question Zuma's ability to determine monetary policy. I think the point made is that increased interest rates is neither lowering inflation nor benefiting the poor or any one else for that matter. Apparently macro economics most significantly the oil price is driving up inflation locally and abroad.

While I think the line of thinking might be fundamentally sound I don't think Zuma has come to his own conclusions or maybe he has. What we must remember is he doesn't govern alone and has presumably a number of academics and economists within the party that advise accordingly...

 

[milomak]

the problem is not with interest rates but with the mandate in my opinion. the reserve bank is given a mandate (that has no escape clause) and thus the only thing they can do when inflation is rising (even if due to external factors which local interest rates will not affect) is to raise rates.

the mandate should be to keep inflation low while also looking at growth (similar to the US mandate). It should also take cognisance of the fact that South Africa is largely a price taker.