By Daanyaal Matthews
The South African economy has seen a bit of reprieve as inflation has stagnated by 0.3% dropping it from 7.1% in March to 6.8% in April. This surprise comes after the rand depreciated against the dollar rising past R19. This phenomenon has been tied to the allegations of United States Ambassador, Reuben E. Brigety, that the South African Government had supported Russia by supplying the Eastern power with arms and ammunition.
The stagnation of inflation has raised conversations on the utilization of the repo rate as a ‘blunt instrument’ to curb inflation with economists differing in opinion on the operation of the Monetary Police Committee (MPC) on the matter.
Some economists have argued that the repo rate is the only instrument available to the SARB to directly tackle the issue of inflation, however, some have argued that the repo rate has a converse effect as it exacerbates the issue of inflation by increasing interest rates.
Speaking on Sunday Live, Economist, Professor Bonke Dumisa, further explains the sentiments of the latter by exploring why South Africa has seen a general rise in inflation, and the depreciation of the rand, stating:
“The inflation we have in SA, most of it, is imported inflation. The rand is weakening may be tied to what happened on the 12th of May, when the United States Ambassador alleged South Africa had supported Russia with ammunitions. So, what happened after the MPC meeting was exactly what happened on the 12th of May – the rand continued to weaken even further. This has nothing to do with the rise in credit in South Africa, that is where they get things wrong. So, when the MPC uses the Repo Rate as a blunt instrument to push down the inflation. It actually goes the wrong direction, it actually pushes the inflation up, because you cannot control that which comes from outside by using something that is used to deal with internal problems.”
The Professor explained the MPC as ideologically skewed, as its basis for increasing interest rates is tied to an older economic model not suited for the current Global Economic paradigm that the Republic currently operates in.
“These are well educated economists, but some things taught three decades ago or two decades ago are no longer applicable in this dynamic – so it was a wrong decision by the SARB to push up the repo rate by 50 basis points. It would be understood if they pushed it up by 25 basis points, which is what I anticipated, because the inflation rate is still far higher than the target inflation rate of 3% to 6% so they would push it up by 25 basis points just to be seen to be doing something for inflation even though that was not going to be effective as well. But, pushing up by 50 basis point, is what lead exactly to the sudden plunge of the Rand,” said Prof. Dumisa
