Reserve Bank governor Tito Mboweni last week cut the repo rate, the interest it charges the commercial banks to loan money a percentage – or a “hundred basis points” – in the inflated language bankers and financial journalists speak.
He has now cat the rate 4.5% since December despite inflation that stubbornly refuses to come down. Just over a year ago Mboweni was threatening to raise the repo rate a whole 2% to fight a monster that he says helps keep the poor in poverty.
Mboweni had been raising interest rates since 2006 – generally 0.5% at a time when inflation breached the upper limits of the three to six percent target zone set for him by the Minister of Finance. Inflation was pegged at 8.4% last month and the repo rate is now 7.5%, so
The commercial banks charge consumers a prime and mortgage rate set – for no particular reason other than precedent – 3.5% above the repo rate.
The governor also warned that he might not be able to make any further “significant” cuts because of certain “structural rigidities making it difficult to achieve our objective”. Most people underestimate the significance of the word “significant”, interpreting Mboweni`s comment as an end to the current run of cuts that is meant to stimulate the economy in the face of the “Great Recession.” It likely means a reversion to form – the half-a-percent move favoured by the Reserve Bank. We`ll know by the end of this month.
But why is inflation so sticky? Business Report newspaper notes Mboweni attacked cartel and monopoly pricing practices in the food and steel industries, and state electricity utility Eskom’s controversial request for a 34% percent increase in tariffs in order to pay for their belated power generation expansion programme.
Mboweni is right that Eskom`s mooted tariff increase is inflationary. But keeping interest rates high to compensate for this rubs salt into that wound. In other words, while recognising that the state-set electricity price (or, for that matter, the regulated petrol price) is taking money out of all our pockets, the Bank believes the best cure is to take even more. So we end up paying twice for fuel, electricity and the like, perhaps even thrice when these higher costs strangle businesses and cause job losses.
Meanwhile, the Engineering News reports new Trade and Industry minister Rob Davies has set a failure standard for himself, telling it he will consider “any further significant de-industrialisation under my watch, even if it is not of our own causing, as indicating that we have not succeeded.”
Business Reports` Business Watch column on Friday stated steel giant ArcelorMittal earned a premium estimated at R20.7 billion between 2000 and 2005 through import-parity pricing. For those who cannot recall that means the company sells its iron and steel products, made in SA, at the rate it would have cost anyone to import that item.
The practical effect of that was that it cost less to make gas canisters with SA steel in
Engineering News has since reported ArcelorMittal abandoned import parity pricing in January 2006, replacing it with a system based “on a basket of domestic prices from a range of international markets”.
This sounds like the civil service dodge of “comparable prices in industry” when setting their own salaries. They typically take three high-end salaries and present that as industry standard. What if bakers or butchers based their pricing on what consumers in
I have never understood this sort of pricing. I have always thought price was the cost of production plus whatever mark-up buyers will bear. The more exclusive the product to the manufacturer, the higher the mark-up may in theory be. Free competition by ethical people in a moral marketplace should see to the rest.
But as the recent bread price-fixing scandal, the rigging of medicine tenders for state hospitals and fiddling fertiliser costs have shown, SA has a greater scarcity of all three than many may realise.
The conduct of ArcelorMittal, Tiger Brands and Sasol has amounted to the de facto privatisation of policy and the effective strangulation of the downstream steel and baking sectors – as well as higher production costs for farmers that has directly translated into higher food prices.
If Davies is to succeed, these are some of the issues he will have to address.