Government to blame for high interest rates Shaun Jacobs

[Nat Quinn]

Government to blame for high interest rates Shaun Jacobs

 

The government is behind inflation through above-inflation increases in basic services, which keeps interest rates higher for longer.

This is feedback from Stanlib chief economist Kevin Lings, who said the Reserve Bank is in a tricky situation regarding South Africa’s stagnant economy and elevated inflation.

Typically, the bank would cut rates in response to poor economic performance to stimulate the economy and boost growth.

However, inflation has remained elevated, which has forced it to maintain interest rates at 15-year highs for an entire year.

South Africa’s sluggish economic performance in recent years and sustained high interest rates have made it difficult for companies to pass on any price pressures.

Consequently, the inflation rate for a wide range of consumer goods and some services has been extremely subdued for many months, averaging below 3% in the first five months of 2024.

This includes clothing inflation, which averaged 2.3% in the first five months of the year; footwear, also with an average of 2.3% y/y; appliances -2.1% y/y; package holidays, 1.2% y/y; public transport, 0.8% y/y; and sporting equipment 1.3% y/y.

Unfortunately, declining inflation in these areas has not been enough to bring the country’s headline inflation down to the midpoint of the Reserve Bank’s 3% to 6% target range.

Lings said this is largely because the cost of key services, predominantly public sector services, has remained above the level of headline inflation and even above the upper end of the Reserve Bank’s target.

While this is not necessarily bad if it is a once-off, the prices of administered services have risen consistently at considerable rates.

This includes the cost of electricity, which averaged 15.2% in the first five months of 2024 and has not been below 6% for many years.

The cost of water rose by an average of 7.9% in the first five months of 2024, education by 6.1% and medical aid by 10.6%.

These percentage increases highlight South Africa’s continued difficulty in getting inflation consistently below the midpoint of the inflation target.

This is especially true since it is unrealistic to expect that the inflation rates for items such as clothing, footwear and appliances will likely fall significantly further than they already have.

To bring the inflation rate fully under control, the government has to focus on controlling the cost increases of key essential services.

Unfortunately, the extensive infrastructure backlogs the country is facing, coupled with the public sector’s severe fiscal constraints, suggests that administered prices will continue to escalate at a relatively rapid pace for many years, adding upward pressure to inflation.

Stanlib chief economist Kevin Lings

The Reserve Bank has consistently urged the government to reduce its spending and the above-inflation increases to administered services, saying that it is making it difficult to cut interest rates.

The Reserve Bank, in its latest Quarterly Bulletin, noted that administered price inflation has accelerated sharply since the beginning of 2023, reaching 8.9% in May 2024.

It said this is primarily due to higher fuel price inflation. However, even when excluding fuel price increases, administered price inflation rose from 7.5% in July 2023 to 8.6% in May 2024.

This is largely due to the year-on-year increases of 8.4% in municipal assessment rates and a 6.3% increase in education services.

When excluding electricity prices, administered price inflation has increased moderately – from 4.2% in July 2023 to 5.5% in May 2024.

In its Monetary Policy Review, the bank focused on the significant hikes in prices charged for government-administered services.

“These regulated, public sector-controlled prices impede efforts to bring inflation down and maintain it at the midpoint of the target band; consequently, they also erode competitiveness,” it explained.

“Electricity and water prices, in particular, have for several years inflated at rates well above the 4.5% midpoint of the inflation target band.”

“Efficiency gains in these sectors would be important to ensuring that long-run, cost-reflective prices are achieved soon,” the SARB said.

“Other administered prices, such as education and assessment rates, are influenced by headline inflation outcomes and should be more closely aligned to the target midpoint itself.”

“Reducing headline inflation would bring down administered price inflation, creating a virtuous cycle.”

 

source:Government to blame for high interest rates – Daily Investor

[Author]

Posts