One of the lingering economic shocks of the pandemic is the inflation surge, particularly food price shocks, which drove up the consumer basket price in SA by 26%, SA Reserve Bank governor Lesetja Kganyago said on Thursday.
He was delivering a lecture on monetary policy and inequality at the University of the Free State, Bloemfontein, on Thursday.
Globally, consumer inflation was 4.7% in 2021, 8.7% in 2022 and 6.7% in 2023. The IMF’s forecast for global inflation for this year remains high, at 5.9%.
In SA, inflation rose to 4.6% in 2021, 6.9% in 2022 and 5.9% in 2023. The SA Reserve Bank expects headline inflation to average 4.9% this year as it gradually returns to the target midpoint of 4.5%.
High inflation and other factors such as job losses widened inequality between and within countries, Kganyago said.
SA entered the pandemic in poor shape, with a decade of stagnant economic growth, declining real income per capita and limited fiscal space, Kganyago said.
Amid the economic downturn during the worst part of the pandemic, the Bank’s monetary policy committee (MPC) lowered the repo rate to 3.5%, a multidecade low.
Lower interest rates benefited higher-income earners more than lower income earners, he said. “Low interest rates may not be the best response to addressing inequality, in part because interest rates have limited direct and indirect effects on the distribution of income,” he said.
Very expensive
Poor households typically borrowed for short periods, and usually at high interest rates. Despite the much lower policy rate, loans to this group decreased despite lower interest rates.
“Informal debt or micro-loans comprise 64% of [poor households’] borrowing, but because this credit is typically very expensive and short term, it is also much less sensitive to the interest rate cycle.”
According to Kganyago, the post-lockdown surge in secured lending was aimed primarily at big-ticket items: by the end of 2021 credit agreements larger than R400,000 were up about 28%, while smaller agreements — those for R20,000 or less — contracted 17.5%.
“The biggest decrease in loans was observed for smaller amounts of R1,500 or less, which fell 72%. In contrast, most lending — about 91% — was for the higher, top 25% of income households.
“It is clear then that the very large interest rate cuts during 2020 had a much smaller impact on alleviating the interest burden for lower-income households, with much of the benefit accruing to higher-income households.”
In addition, he said, due to lingering supply side constraints in SA such as insufficient electricity and logistical constraints, monetary policy “can only do so much” to encourage the type of economic growth that will help create jobs and lower inequality.
Central banks, he said, “cannot be the only game in town”.
“We cannot deliver all the social progress we all desire. We can create a base for it; we can help navigate the economy through crises, but not more.
“We are often encouraged to do more, but ... this fundamentally speaks to the limitations of our state capacity. Changing interest rates is certainly easier than improving education, managing urbanisation or ending load-shedding.”
To achieve better growth and less inequality, SA needed significant improvements in its supply environment. “This will create the space for monetary policy to play a more supportive, enabling and appropriate role in achieving economic progress.”
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