Reserve Bank urged not to overreact in response to inflation now

Now is not the time to act hastily by raising interest rates further.

This is according to Theuns du Buisson, economic researcher at the Solidarity Research Institute (SRI), following the announcement of an increase in inflation that significantly exceeds the Reserve Bank’s inflation target.

Du Buisson says that although inflation has risen substantially to 5%, up from last month’s figure of 4.5%, interest rates should not be increased any further. The interest rate was already raised by 25 basis points in May this year specifically to curb further increases in inflation.

“The current rise in inflation has very little to do with interest rates. It is rather the consequence of the conflict in Iran and the knock-on effects of high fuel prices, which are now also being reflected in the prices of other goods and services.

“At this stage, however, that has not yet occurred to any significant extent, and the current increase in inflation is, for all practical purposes, almost entirely attributable to fuel prices,” says Du Buisson.

“Unfortunately, the Reserve Bank has only one thing for leverage at its disposal when it comes to controlling inflation, and that is interest rates.

“At this stage, an increase of the interest rate would have only a relatively limited effect on inflation, while at the same time eliminating any realistic prospect of meaningful economic growth.”

According to Du Buisson, higher interest rates are normally used to cool an overheating economy that is fuelling inflation.

“That economic theory is sound, but in practice the economy does not operate like a textbook. Other factors – such as an oil crisis – can also have a significant impact on inflation, although such effects are usually shorter-lived

“Unfortunately, the war currently driving inflation has continued for longer than most analysts expected. Its impact on inflation will therefore be felt for somewhat longer, but that does not change the fact that it will eventually pass,” he says.

Solidarity therefore calls on the South African Reserve Bank’s Monetary Policy Committee, which meets on Thursday, not to focus solely on the current inflation rate, but rather to recognise that the present increase is temporary in nature and beyond its control.