MPC decision will limit job creation and economic recovery

Today's decision of the Monetary Policy Committee (MPC) of the South African Reserve Bank to increase the repo rate by 25 basis points does not make sense at all.


Firstly since the MPC states that the inflation outlook improved since the September meeting when it decided NOT to increase the repo rate.

Secondly, the MPC then creates confusion as it states that it assesses the risks to the longer term inflation outlook to be on the upside. Does it mean then that the upside-risks were not included in the improved inflation outlook?

But these risks are also exactly the same as those mentioned in its September statement when the decision was taken NOT to increase the repo rate.

These views are contradictory and reveal decision-making inconsistency. It creates the impression that the MPC went into its meeting with a rate increasing bias instead of objectively.

Moreover, the MPC states that it struggled to disentangle second round effects from first round increases, and as a result had to decide whether to increase interest rates now or later. 

 

Therefore the assumption had to have been that second round effects would be strong and must be limited - but if that is the case, why then did the MPC state that the inflation outlook improved? If the assumption is correct that second round effects will be strong, then surely the inflation outlook should have deteriorated and not improved.

Increasing the repo rate in recessionary conditions has made it more difficult for the economy to grow and create jobs on a macroeconomic level, and that government will have to allocate a larger portion of its tax income to finance its interest bill, leaving less money for other services which may put further pressure on the National Treasury to increase taxes.

On the micro-level, which the MPC seems to ignore, more hardship will be caused for the vast majority of the already struggling workers and consumers who already had to contend with a higher income tax and VAT-burden. 

 

It seems clear that the MPC deems balanced economic growth and job creation as secondary priorities although its mandate is to ensure balanced economic growth.

Lastly, the notion that the MPC is looking at the long run is ridiculous as - to quote a famous economist - "in the long run we are all dead".

 

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