15/11/2008 15:34 - (SA)
Opposition to inflation-targeting gathers steam
Andile Ntingi
FINANCE Minister Trevor Manuel, Reserve Bank Governor Tito Mboweni and other staunch supporters of the inflation-targeting policy have an uphill battle on their hands against trade unions which are vying to have the policy scrapped.
A sharp spike in house and car repossessions and looming job cuts have once again emboldened the powerful labour federation, Cosatu.
It criticises the country’s inflation-targeting monetary policy and blames it for worsening the plight of businesses and consumers who are already taking strain from high fuel and food prices.
Cosatu chief Zwelinzima Vavi said this week the federation would continue to push for the scrapping of the policy because it had led to a series of unwarranted interest rate hikes which had slowed the economy and threatened jobs.
“We want the inflation-targeting to be scrapped. But if we cannot win the debate we want the 3% to 6% target band to be revised upwards to a more realistic level because South Africa is a developing economy, not a First World economy.
“This policy has reversed some of the gains we have made. The high interest rates are punishing us and between 6 000 and 7 000 cars are being repossessed every month and small businesses cannot grow because capital has become so expensive,” Vavi said.
He said Cosatu was going to use its influence in the tripartite alliance, led by the ruling ANC, to push for the policy to be abandoned. The other member of the alliance is the SA Communist Party, which is a key leftist ally of Cosatu. The two often mimic each other’s position on economic policy.
Vavi said ever since former president Thabo Mbeki was defeated in the ANC leadership race by Jacob Zuma in Polokwane in December last year there had been a free-flowing debate on a number of policy issues, including inflation targeting.
“In the past economic policy was a holy cow that could not be debated in the alliance. There was a lot of arrogance and discussions were not allowed. Since Polokwane we have been liberated and there is a lot of debating taking place,” Vavi said.
Even Manuel, the staunchest defender of the country’s conservative monetary and fiscal policies, was showing open-mindedness.
“He (Manuel) is debating with us and he is not shutting us down. We are happy with that,” Vavi said.
Krister Janse van Rensburg, a researcher at union federation Fedusa, said South Africa’s monetary policy should be geared towards reducing unemployment.
“Fedusa proposes an employment-targeting monetary policy in which employment growth and real gross domestic product (GDP) growth are included in the primary constitutional mandate of the Reserve Bank.
“The ultimate target of monetary policy should be employment growth, while intermediate targets should be real GDP growth, inflation-targeting and exchange-rate moderation,” he said.
In a rare show of support for trade unions, economist Roelof Botha said the Reserve Bank’s punitive application of its monetary policy was ill-advised. This was particularly evident as the economy was in a capital expansion drive led by the R600-billion spending by government on infrastructural upgrades.
“When you are going through a massive capital formation you need to have a flexible monetary policy,” said Botha. “Every sector of the economy has been involved in capital formation, but the Reserve Bank has not been accommodating. How can the private sector create jobs if it has to pay high interest rates?”
By the end of the second quarter, fixed investment accounted for 22.4% of the GDP, the highest level since 1985.
Botha was concerned that the private sector, which accounted for about 72% of total investment in the first half of 2008, was taking strain from the high interest rates. “If interest rates do not fall, capital formation will decline because a large part of it is interest and the cost of capital is very high now,” he said.
In a futile attempt to keep consumer inflation within the 3% to 6% CPIX target range, the Reserve Bank has hiked its repo rate 10 times from 7% in June 2006 to the current 12%. This has taken prime lending rates to 15.5% from 10.5%.
But the interest rate hikes have not worked as the CPIX inflation – which is driven by high fuel and food prices – has remained above the target and the latest official figures show it hovering around 13% in September.
The only saving grace for South Africa is that the crude oil price has come down substantially and could lead to more petrol price cuts if the rand remains stable. This could help push inflation lower because high fuel costs contribute to the general price increases in the economy.
But Absa Capital chief economist Jeff Gable said inflation-targeting was vital. “Find me a country that allows inflation to be higher than 6%. The fact is the euro zone has a target of below 2%, and the UK 2.5%.
“South Africa’s target is a vastly easier target to achieve and is triple that of Europe.”
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