Call to overhaul Reserve Bank MPC – and cut interest rates by up to 200bps

In its first meeting for 2024, the Reserve Bank’s Monetary Policy Committee (MPC) voted to keep interest rates at the highest levels since 2009 – and some economists are calling for a committee reshuffle, saying that rates could be much lower than they are today.

On Thursday (25 January), the MPC decided to hold the repo rate at 8.25%, with the prime lending rate at 11.75%. The bank’s decision was unanimous and falls in line with market consensus.

While the SARB acknowledged the easing inflationary environment, the bank remained hawkish in tone, warning that the risks to the inflation outlook remain on the upside – particularly around food inflation, and the power, logistics and infrastructure crises in South Africa.

However, research economist Dr Roelof Botha said there are some serious flaws in the SARB’s Monetary Policy, and changes must be made.

Speaking to eNCA, Botha said that he has long called for changes to the composition of the MPC – arguing the committee must include people with an intimate knowledge of how much financial pain is suffered when interest rates are unnecessarily high.

“I believe a much more representative group of people with in-depth knowledge of economics and the business environment should be members of the MPC,” said Botha.

Speaking on South Africans struggling with money and being in recession in terms of their ability to spend, Reserve Bank governor Lesetja Kganyago said last week that this was one of the key reasons for the central bank’s policy moves.

Kganyago noted that disposable income is weak, in real terms (meaning adjusted for inflation), stressing that it is inflation that is eating away at household cash.

This is why the bank is targeting reduced inflation, and wants it sustained near 4.5% before considering cutting rates.

However, Botha argued that this reasoning is detached from the reality of inflation in South Africa – specifically that the country is not being subject to demand inflation, and hasn’t been since the MPC voted to hold rates at current levels in July 2023.

He argued the MPC’s decisions have had little impact on inflation – rather, pricing has been driven by external factors.

“Every economist has pointed to external factors as indicators of the inflation peak, as well as the reasons why inflation has dropped – and it’s not because of the MPCs rate hikes, which have only hurt South Africans and business in the country,” he said.

Botha said this shows the current MPC appears to lack an understanding that the inflation currently being experienced in South Africa is being fueled by temporary weakness of the rand, volatile global commodity prices (such as crude oil), as well as increased input costs that have been impacted by load shedding and the logistics crisis.

“All of which are unaffected by the SARB’s rate decisions, and can’t be fixed with higher interest rates,” Botha said.

MPC members must be reshuffled

Botha said that South Africa is currently at the mercy of only five individuals comprising the MPC, and that they should be shuffled out or the entire structure of the committee be changed.

The economist said that the MPC should include the following:

• Three people from the Reserve Bank;
• Two from the National Treasury (preferably the Director General and chief economist);
• Two from the Department of Trade Industry and Competition (preferably the Director General and chief economist); and
• Three private-sector economists (preferably a doctorate in economics and at least 25 years of experience).

He added the group can be expanded to include competent representatives from the Development Bank of Southern Africa (DBSA), the Small Business Institute (SBI), The Banking Association South Africa (BASA), and The South African Institution of Civil Engineering (SAICE) – which have in-depth knowledge of the cost of capital.

Botha has noted that if this make-up were the case currently, South Africa’s prime rate would be 200 bps lower than it is today.

Botha said that there are many flaws in the Monetary Policy of the SARB, and it needs to urgently start focusing on stimulating employment and economic growth.

South Africa is only expected to enter a rate-cutting cycle later in 2024, with most economists and analysts pencilling in a trio of 25bps cuts starting in July or September.

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