The Reserve Bank has announced an increase in its lending interest rate to commercial banks today by 25 basis points to 3,75% that will also increase the overdraft rate to 7,25% as well as all other interest rates of the commercial banks with immediate effect.
The Reserve Bank, just like most other central banks in the world such as the Federal Reserve Board in the USA and the European Central Bank, believes that its interest rate policy can also stabilise (“anchor”) prices between its inflation targets of 3% to 6%, protect the value of the currency and stimulate economic growth which is single biggest delusion in economic science as there is absolutely no evidence to substantiate these claims. The same is true for the latest suggestion by the Governor of the Reserve Bank, Lesetja Kganyago, to change the existing inflation targets to a fixed target of 3%.
The inflation rate is determined by all the local and international political and economic factors that have an influence on the supply and demand of goods and services, and the value of the currency, respectively! Economic growth is created by the supply and demand sides of the economy, as proven by Statistics SA every quarter, that is driven by the profit motive!
The first question that must be asked is why does the Reserve Bank punish consumers for price increases that they are not responsible for? What can the Bank do about the increases in the international crude oil price, a weakening exchange rate that will further deteriorate because of the devastating political and economic socialist ideology of the ANC government as well as all the taxes and levies on local fuel prices which is controlled by the government on the basis of a fixed formula and annually increased that has nothing to do with the consumption of fuel by consumers!! Exactly nothing!
The price of crude oil fell last year due to the Covid19 pandemic to the point where some international oil producers went down financially which was responsible for the lower crude oil supply. Now that the greatest danger of the pandemic has subsided, demand has risen sharply again which the Petroleum Exporting Countries (OPEC) and Russia have not yet been able to meet. The price of Brent crude oil has surged more than 60% in 2021, reaching a three-year high of $86,70 last week as demand recovers, while OPEC and Russia have eased record output cuts in 2020 slowly with gradual monthly production increases despite calls for more crude oil from the US and other consumers.
The international price increases of crude oil are consequently out of the control of the central banks who still believe that they can solve the imbalance in the market by increasing interest rates which is meaningless but which has once again punished local consumers for price increases for which they are not in any way responsible for.
The second question that must be asked is what can the Bank do about the increasing and excessive profit margins on food by the manufacturing and trading industries in the economy that consumers are not responsible for and in no way related is to the demand for food? The prices of agricultural products is traded in a futures market, the South African Futures Market (SAFEX), that are solely determined by the market forces of supply and demand in the market. The prices of local producers are, in fact, the international derivative prices of agricultural products that are traded on the US futures market, the Chicago Board of Trade, and are also purely determined by the operation of the market forces of supply and demand.
International agricultural producers and food prices have increased sharply the past year because of international higher demand for food but even more because of the “disruptions to the global supply chain that are set to persist in 2022, according to the chief executive officer of Cargill Inc., David MacLennan, the agriculture powerhouse in the United States, who highlighted labour shortages as one of the biggest risks facing the industry.1)
He says that “world food prices climbed to a decade high in October, as indicated in the following chart, that were responsible for even higher grocery bills for households and potentially worsening of global hunger.
Bad weather has hit harvests, freight costs have soared and labour shortages have roiled the food supply chain.
An energy crisis has also caused a dramatic surge in fertilizer bills for farmers all around the world. Even with “the inevitable natural disasters coming from climate volatility, by and large, the food supply chain has worked pretty well in the last year or so with Covid-19, but nonetheless, it’s something we cannot take for granted.
The search for “greener” vehicles, aeroplane fuel and biodiesel for production and road transport are also pitting food against energy production, leading to tighter edible oil supplies. Prices for palm oil, the most consumed vegetable oil in the world, have soared about 50% in the past year, while soybean oil is up 60%. Canola vegetable oil is near a record.
The “food-versus-fuel” tension will also, according to MacLennan, become more intense than it’s ever been in the last 15 years. The day will come when more agricultural products will be used for clean energy than food, so it will be incumbent upon the farmers of the world to innovate and become more productive.”
Something that the international and local agricultural producers have already started with over the past decade or two with the aid of the many new international technology developments in the world.
It is expected from the agricultural industry is to produce “cheap” food for poor people, according to the latest newsletter Agri SA, while no farmer in the world can produce food at prices that poor people can afford. Food security can only be sustainable if the production of food is profitable. It is not the responsibility of agricultural producers but the government that determines the macro and agricultural economic policy of the country.
The third question that must be asked is why the international central banks believe that consumers prices are only determined on the demand side and not also on the supply side of the economy such as crude oil production natural disasters that can, among others, can cause severe droughts and floods.
Most consumers are still struggling financially for months now and are not yet able to increase their consumption spending to the same levels as before the pandemic due to the higher unemployment.
In its provisional financial budget tabled in Parliament last week, the government has made it clear that it is not in a position to address the serious fiscal and social problems in the country and to consolidate its debt as if it will make any difference to its budget deficit and debt burden that will become more clear during the main budget in February 2022.
The interest rate policy of the Reserve Bank cannot contain the inflation rate, protect the value of the currency and stimulate economic growth rate because these economic variables are all determined by the operation of the market forces of supply and demand in the economy and to place its focus on the expenditure of consumers that is not in any way responsible for the price increases of fuel and food is the wrong target,” according to Brink.
Fanie Brink, Independent Agricultural Economist
1) Cargill CEO Says Global Food Prices to Stay High on Labour Crunch
