As Louis Gossett Jr advises in the Windhoek ads, “Keep it real”.
When it comes to interest rates and alcohol, real is better.
So forget about inflation-targeting. Let’s have a new target: a positive real interest rate of say 3%.
What this simply means is that if inflation is 14% then the Reserve Bank’s influential repo rate must be 17%.
So interest rates will always be higher than inflation, and there will be no widespread incentive to spend rather than save. If the banks can somehow be “persuaded” to offer real interest rates to those unfortunate ordinary people who have savings accounts, so much the better.
There will also have to be a rule that allows much higher interest rates if inflation breaches some crucial point, probably 20%. At higher inflation rates much higher positive interest rates are needed temporarily to get inflation under control.
The reason for focusing on positive rates is that negative real rates introduce all sorts of distortions into decision-making. When real interest rates were negative in the 1980s I remember sitting around the table with a bunch of middle-class citizens who were all scheming to get deeper into debt because it did not pay them to have cash in the bank. The prevailing interest rate regime punished anyone with cash.
So in times of negative rates, the prices of hard assets, particularly real estate, soar. That means anyone who already owns a home, scores, and would-be homeowners struggle to jump on to the property merry-go-round. The more debt the merrier. Pensioners who have to live on the interest on money they have saved for years are simply ignored and left to eat dog-food.
I know there is a view that a higher inflation rate can be tolerated: Higher Education Minister Blade Nzimande once asked rhetorically what the magic was about the 3% to 6% target range for inflation.
There is none. You could have a target range of 10% to 15% but you would still have to put interest rates up and keep them up if the target range was breached and expectations were that it would not fall.
What, I wonder, would be the point of introducing such a more relaxed target range now? Inflation is falling fast, as economic growth cools. Luckily, it doesn’t look like we’ll get deflation, which is where prices continue to fall as people defer buying things indefinitely because they will always be cheaper tomorrow.
For me the importance of a target of 3% to 6% inflation is that it’s closer to zero than 10% to 15%. I remember well the years of steady average 14% annual inflation, and it really did not do the country any good in jobs or growth.
Lest you think that inflation is trivial, just look over the border at Zimbabwe. Inflation has rendered that country’s currency irrelevant, and consequently taken monetary policy out of the hands of the central bank.
Even if you task the Reserve Bank with targeting growth or jobs, it cannot just forget about inflation, or the currency will quickly go the same way as Zimbabwe’s, and an important part of any central bank’s mission is to preserve the value of the national currency.
What the new government can do, however, is try to ensure that we don’t rely on interest rates alone to keep inflation in check. And I don’t mean government should introduce price controls.
What government can do is moderate administered prices, that is the prices government already controls or has a major influence on, such as the prices of electricity, transport, and even education.
It can get more competition into the economy to lower prices. Part of this will be achieved through competition legislation.
And part will be through liberalising areas like telecommunications. In telecommunications government control — through licensing, through part-ownership of Telkom, and through it Vodacom — has achieved little, and was even counterproductive.
So it means a mix of actions and a refined policy. Privatise if necessary: nationalise if necessary. But all with the aim of greater efficiency, not control for control sake, or state patronage.
A new co-ordinated government push to counter inflation will achieve better results than leaving the Reserve Bank to do it all alone.
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