Dr Roelof Botha, the economic advisor of the Optimum Group is right about monetary policy for all the wrong reasons,” says independent economist Fanie Brink.

Brink referred to an article “Reserwebank ly aan tonnelvisie” ("Reserve Bank suffering from tunnel vision") ( by Dr Botha that appeared in the media this morning saying that:

1. Monetary policy has virtually no influence on the inflation rate because prices are determined by supply and demand and not by interest rates.
2. It also has no impact on economic growth, as growth is driven by the profit motive and not by interest rates.
3. The same applies to the influence of interest rates on the total operating capital costs on the profitability of businesses because it is only 3%. For example, a gold mine's profit is determined by the ratio between the prices of gold ore and gold as well as the amount of gold needed to produce 1 kilogram of gold.
4. The prices of agricultural products do not exert any cost pressures on the inflation rate because it is purely determined by supply and demand and not through the production costs plus a profit margin, and therefore farmers have no mechanism to pass any cost increases on to the consumers as all the other industries in the secondary and tertiary sectors of the economy. Especially if the price of maize, for example, fall from R5000 to less than R2000 drops due to a much larger supply than the local demand for maize. The same principle applies to other industries in the primary sector of the economy such as the forestry, fisheries and mining industries.
5. The low demand inflation is the result of the pressures on the consumer's real disposable income due to their high debt burden, unemployment and rising taxes and not interest rates. It is therefore a total myth that interest rates reduce higher consumer spending.
6. The effect of interest on the state's income is negligible because it is determined by the profitability of the economy, that is, the profitability of all individual business enterprises in all the differences industries and the collection of taxes.
7. This is the first time I ever read that an economist in South Africa says that interest rate rises cannot stabilise the exchange rate, which is correct, even though they all agree with the specific prescription in accordance with article 224 (a) of the Constitution that it is the primary function of the Reserve Bank. In fact, the exchange rate is determined by all local and international factors that influence the Rand's demand and supply vis-à-vis the currencies of other countries.
8. Moody's, the debt rating agency, is entitled to reprimand the Reserve Bank on its continued restrictive monetary policy, but the International Monetary Fund (IMF) has for many years to advise the Reserve Bank that it should tighten its monetary policy only to adjust the country's economic growth rate downwards every time two months later.
9. It will not help to include some of the private sector economists on the Reserve Bank's Monetary Policy Committee (MPC) because they all always believe inexorably that nothing is more accurate and more wonderful in the economy than monetary policy!

"Monetary policy is in fact an irrelevant and insignificant policy for which there is no evidence for the claims made by all the central banks in the world and the IMF that it can control inflation, protect the exchange rate and stimulate economic growth. In fact, simple statistical analyses clearly show that the changes in interest rates cannot explain or declare the changes in the inflation and exchange rates or economic growth."


30 November 2018
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