Month: March 2025

In monetary policy doing the obvious makes sense.

I propose a case study in monetary policy. The economy to be investigated is stagnant. Very little growth in GDP is being recorded. Spending on capital goods, plant and equipment is even more subdued than spending by households. The demand for bank credit has not grown in real terms for a number of years. Indeed, is still below pre Covid levels, as is economic activity.  But not all the news is bad. Inflation is well down – indeed prices have hardly increased for six months.

But short-term borrowing costs have lagged well behind the declining inflation rate. The difference between the interbank lending rate for 3 months and annual inflation, real rates, is 4.4% p.a. a level not approached since 2003. It would seem perfectly obvious that the appropriate policy response would be to cut the key repo rates immediately and significantly to stimulate much needed spending growth for which interest rate settings are a significant discouragement.

But as readers will have guessed the economy is South Africa. The charts tell the story. Yet the Reserve Bank has successfully guided the money market to expect little by way of interest rate relief. The Forward Rate Agreements between banks indicate that short rates are expected to decline by no more than 50 b.p. over the next twelve months and that even a cut of 25 b.p. at its meeting this week is considered unlikely. This reluctance of the SARB to do what would be obvious to most is what makes this case study particularly compelling.

Real Bank Credit supplied and demanded by the Private Sector and the Real Economy. Monthly Data (2019=100)

SA; Real Short-term interest rates and Inflation 2020-2025. Monthly Data.

Source; Bloomberg and Investec Wealth & Investment

Some further facts might illuminate the case further. Why it should be asked has inflation come down so dramatically in SA? It is because spending (the demand side) remains depressed and because the supply side of the price equation has been especially helpful over the past year. It must be so given that exports and imports directly affected by the cost or value of foreign exchange are equivalent to 60% of GDP. And the ZAR has been unusually mighty.

Where the exchange rate goes so go prices – as has been the case in recent years. Rand weakness in 2023 led prices and inflation higher – and interest rates followed. Then strength in the rand since early 2024 has helped to largely stabilise the prices of imports and the CPI since mid-2024.

The ZAR Vs the USD and the EM Basket and the CPI. Lower number indicate ZAR strength. August 2024=100. Monthly Data

Source; Bloomberg and Investec Wealth & Investment

Exchange Rates; ZAR Vs the USD, Aussie dollar and EM Basket (Jan 2024=100) Daily Data

Source; Bloomberg and Investec Wealth & Investment

How then does one explain the behaviour of the rand- the single most important influence on the CPI? The introduction of the GNU improved the outlook for structural reforms and faster growth in GDP -and so improved the case for investing in SA to the benefit of capital flows and the rand. The biggest threat to fiscal sustainability in SA and to its bond market and so to the level of longer-term interest rates and debt service costs, is the absence of growth. Slower growth expected means a weaker rand and more inflation and more inflation expected and higher borrowing costs. And vice versa. The Reserve Bank contributes to growth via the influence of its interest rate settings on demand. The exchange rate nor therefore inflation is not under its direct control.

No doubt we will learn from the SARB about the global risks it has to contend with. But these are risks over which it has no predictable influence or the ability to predict confidently. Parliament and its decisions about the allocation of taxpayer’s money, especially to capital expenditure, will dominate the immediate outlook for growth and the ZAR.  Inflation expected has only declined marginally in recent months.  Yet again will be given by the SARB as a reason for not lowering interest rates further. But inflation expected can only recede with persistently lower inflation. That can only come with persistent rand strength. It too is beyond any direct control by the SARB.

The SARB focus should be on managing the demand side of the economy – using its interest rate settings to prevent too much spending that might lead prices higher and avoid too little spending that would depress growth.  Which now means lower interest rates. It is simple logic.

Inequality of wealth is very helpful. The sages agree.

You are only wealthy if you have saved a good proportion of your income over the years and not consumed it all, to sustain an extravagant lifestyle. It is however your wealth that makes your large incomes and consumption tolerated by the wider society. Thus making it possible for the talented and diligent and hard-working and, most important for a growing economy, the enterprising and innovative successful risk takers, to earn their high incomes legitimately and enjoy their consumption and also help create their most useful wealth.

The savings that add to wealth and most important are invested productively by the income seeking business organisation that also saves and borrows and undertakes capex on behalf of their owners. These firms are given the responsibility to manage the capital stock and all the complementary scarce resources that are entrusted to them. Including employing workers and managers whose wages and rewards will depend on the good returns on capital (savings) their employers are able to realise to sustain their enterprise.

The more such capital is created and made available to the economy in the form of plant, equipment, dams, roads and ports etc and the more efficiently they are managed, the higher will be the incomes earned by the poorer households. More capital raises the relative scarcity of labour and improves productivity and incomes. Which makes the people understandably willing to protect the wealth that funds real assets against damage or theft or violent expropriation by local or foreign invaders. The protection and respect for property, that is for capital or wealth, in turn encourages the potentially higher income earners to venture more, to earn more and to save and invest more in the capital stock. Thus serving the essential interests of the wider community.

The consumption of others is not helpful to you- it adds to the competition for scarce resources. Saving, accumulating wealth to fund an investment in real assets is very helpful for the many without much wealth. It is the large-scale waste of capital, extracted by taxes, as has been the case with our SOE’s, that should be condemned.

Such essential willingness to protect property is to be found in the Bible and the rabbinical commentaries on it. As I was pleased to discover at a recent joyous barmitzvah. The substance of the readings that day were the laws and regulations governing the protection of property and compensation for its damage, intentional or accidental. And about laws that also regulated the rights and obligations to an important asset class of those times, the slave. All food for my economist soul.

There was little more I could read that morning about the creation and purpose of wealth. I thought I would ask this question of the Torah and Rabbinical commentary, the Talmud using AI. Rab AI so to speak. Here is a summary of the responses received, with my reactions indicated between brackets.

“The Talmud places a strong emphasis on the importance of hard work and diligence. It acknowledges that while effort and work are important, ultimately, one’s success may also depend on divine blessing. (Unbelievers will call this luck) The Talmud establishes the principle that those who are wealthy have a responsibility to support the less fortunate. The act of giving is seen as a valuable pursuit, and generosity is highly praised. Wealth is viewed as a trust that comes with significant responsibilities – that one should use their wealth not just for personal pleasure but also for the betterment of society. This includes supporting community needs and contributing to public welfare. (My point about the social purpose of wealth being the creation and preservation of the productive capital stock for the benefit of the greater society, has not apparently been recognised)

The Talmud warns against excessive attachment to wealth. A person should not let the pursuit of wealth dominate their life to the detriment of their spiritual and ethical responsibilities, that through work and the creation of wealth, one can achieve personal and communal fulfilment.”

(Ancient wisdom that is clearly consistent with human aspiration and economic development that implicitly recognises inevitable differences in economic outcomes as socially helpful)