The Independent Municipal and Allied Trade Union (IMATU) is disappointed by the Monetary Policy Committee’s (MPC) decision to keep interest rates on hold at 6.75%.
IMATU believes that the Reserve Bank missed an opportunity to lower interest rates. Consumer Price Inflation (CPI) is presently recorded at 4.1%, falling below the 4.5% mid-point of the South African Reserve Bank’s (SARB) inflation targeting range. Based on the Bank’s own forecasts, headline inflation is expected to remain below 5% this year, with annual CPI calculated at 4.8%.
“While we understand that the mandate of the MPC is to target inflation, we remain concerned by our country’s poor domestic growth forecasts and escalating unemployment figures. Many of our members and South African consumers are cash-strapped, financially burdened and indebted. Consumers are expected to pay substantially more for fuel and electricity, which automatically affects the price of transport, food and other household expenses. South Africans have only seen two interest rate decreases in the past five years despite the country’s inflation forecast sitting comfortably within the Reserve Bank’s target range of 3-6%. The lowering of interest rates could have provided consumers with financial respite, increased disposable income and promoted growth through enhanced household spending capacity,” reasoned IMATU General Secretary, Johan Koen.
The Reserve Bank has only decreased interest rates twice in the past five years. In July 2017, despite projected inflation rates of 5.3%, the Reserve bank lowered interest rates by 25 basis points and interest rates were again lowered in March 2018.
IMATU believes that our current economic situation almost mirrors that of March 2018 when headline inflation was recorded at 4.0% and projected CPI at 4.9%. As the Reserve Bank lowered interest rates then, IMATU cannot understand the justification for increasing interest rates in November 2018 and now leaving rates unchanged.
Six separate interest rate hikes since 2014 have done little to improve South Africa’s Gross Domestic Product (GDP) growth or mitigate the depreciation of the Rand. Annual GDP continued to decline throughout the Reserve Bank’s increased interest rate cycle between 2014 and 2017, settling at a meagre o.8% at the end of 2018. Furthermore, historical exchange rate records highlight the disconnect between increased interest rates and attempts to promote long term currency stability. At the start of the interest rate increase cycle, the Rand was trading at R10.97 to the Dollar and has steadily weakened to the present value of around R14.68.
“We will be closely monitoring Moody’s credit rating announcement tomorrow. Moody’s is the only international ratings agency still recording South Africa at investment grade and has consistently cited weak economic growth as a reason for further downgrades. While acknowledging the Reserve Bank’s mandate to target inflation, IMATU would welcome the inclusion of factors such as economic growth and employment when making decisions pertaining to the country’s interest rate,” concluded Koen.
High unemployment, low economic growth and overstretched consumers necessitate the need to provide financial relief where possible. IMATU believes that this missed opportunity will exacerbate already unbearable financial pressure on consumers.