Interest rate hikes are inflation not a cure for inflation 29-07-08

 

Interest-rate hikes are inflation, not a cure for inflation

In his briefing to the media following the July Cabinet Lekgotla, President Thabo Mbeki said the following:

“The world is facing stagnation and a number of countries are starting to take firmer action to curb the demand for commodities (lifting subsidies) and to contain inflation pressures (higher interest rates and currency appreciation). In South Africa, inflation is accelerating and the current account deficit is expanding. This situation poses some risks for high inflation and prolonged high interest rates, rising financial and macro-imbalances and slower economic growth.”

These words of President Mbeki’s have been widely interpreted as offering support to the South African Reserve Bank’s policy of raising interest rates, in the spurious hope of thereby holding down inflation.

COSATU therefore wishes to re-state its long-held conviction that the series of punitive interest-rate rises imposed by the Reserve Bank - ten 0.5% increases since June 2006 - have only served to increase inflation, to the point where high interest rates have become one of the main props of inflation.

South Africans are not fools. They see and feel the effect of higher interest rates very sharply. There is no mystery or alchemy that can convert the high price of money into a lower mortgage bond payment, or lower energy and food prices.

For the Reserve Bank to continue to make such fraudulent claims is only to add insult to injury. We sincerely hope that President Mbeki’s guarded words have been misinterpreted.