Fedusa calls for 100 basis point repo rate cut

The Federation of Unions of South Africa (FEDUSA) is calling on the Monetary Policy Committee (MPC) for an interest repurchase rate cut of at least 100 basis points in order to stimulate our economy and lessen the burden on working people. This call is premised on International Monetary Fund (IMF) research, FEDUSA Affiliate UASA’s recent optimal prime rate study, as well as global macroeconomic trends. This study made some startling findings that support FEDUSA’s long-time efforts to have the South African Reserve Bank (SARB) mandate reviewed.

“The rest of the world is starting to realise that inflation targeting alone is a narrow and outdated method of stabilising our economy,” stated Krister Janse van Rensburg, FEDUSA Deputy General Secretary. “Yes, inflation is important for the purpose of price stability, but it should not supersede the creation of sustainable jobs,” he said.

FEDUSA is calling for the interest repurchase rate to be cut by 100 basis points tomorrow to soften the blow of increasing petrol and electricity prices. FEDUSA, supported by a growing number of leading economists, believes that the SARB’s monetary policy focuses on only one instrument, namely the short-term interest rate, to directly control inflation which is actually structural by nature.

“The MPC needs to fully take account of the Finance Minister’s letter to the SARB Governor last year, where he explicitly requested the Committee to be more flexible in their approach and also include other issues when considering the repo rate.  We cannot afford to maintain interest rates at the current level if we are really serious about stimulating the economy and creating jobs”, added Janse van Rensburg.

As IMF chief economist Oliver Blanchard stated in his 2010 paper Rethinking Macroeconomic Policy, it is incorrect for economists to think of monetary policy as having only one target, inflation, and one instrument, the interest rate. Stable and low inflation should no longer be the primary mandate of central banks; the real unemployment rate must be added to the equation. According to Stats South Africa unemployment figures from 2003-2010 show that 5-6 million workers out of a labour force of between 17-18 million remained unemployed during the good and bad economic times.

FEDUSA Affiliate UASA further reinforced the need to seriously review the SARB’s archaic method of controlling macroeconomic stability at the launch of their macroeconomic study yesterday. The UASA Optimal Repurchase Rate Estimate using the Rudebush method explores alternative ways of realising an optimal repo rate which will address both the unemployment situation and price stability.

This research, conducted by Prof Carel van Aardt, economist from the Bureau of Market Research, and Johann van Tonder, economist of Economic Trend South Africa, suggested that South Africa’s prime rate should be a startling 5.2% as opposed to the current 9%. Historical research has uncovered that South Africa’s current inflation target, currently set at between 3% - 6%, is based on limited macroeconomic analysis. More disturbingly, UASA’s report identifies that more than 50% of the current basket of goods and services making up the Consumer Price Index (CPI), is in fact immune to any inflation-targeting measures.

Furthermore, this study takes into account real unemployment rates and sets no specific inflation target. While FEDUSA and UASA are by no means suggesting that targeting inflation is not a priority, we want to see a more sophisticated way of targeting inflation while also targeting the problem of massive unemployment.  In this regard South Africa needs to take cognizance of the growing global opinion that the number of macroeconomic targets and tools needs to be expanded. “We operate in a complex global economy and therefore our instruments and policies need to be sufficiently sophisticated.  This became very clear during the recent economic crisis,” commented Janse van Rensburg.

FEDUSA has been raising these concerns since 2007. In a proposal to the Presidential Trade Union Working Group in October 2007 and subsequently to the then governor of the SARB in August 2008, FEDUSA highlighted that there “is no target for any of these variables other than for the CPI, which is the benchmark for monetary policy decisions. Also, visibly there is no deliberation of, or target for vital issues such as levels of unemployment or shared growth.”  Janse van Rensburg says that FEDUSA has agreed with SARB Governor Gill Marcus to collaborate on further research in this regard.

“While very tempting, this is not a time to say that we told you so,” said Janse van Rensburg, “government, business and organised labour need to work together to bring about lasting and sustainable macroeconomic change. If we don’t do this now, we will certainly run into problems later this year when the MPC would probably want to start raising rates to curb the inflation caused by the fuel and food price hikes.  This, in turn, will lead to greater job losses and misery for many of our members.  We cannot afford to have ordinary working people suffer due to the policy uncertainty of Government and implementation conservatism on the part of the MPC.”