Fanie Brink, Independent Agricultural Economist,
"The Reserve Bank could even have lowered its lending rate to 0,0% and it would not have had any significant impact on the inflation rate and economic growth as both these economic variables are determined by the demand and supply in the economy on which interest rate changes have only a negligible small influence," says Fanie Brink, an independent agricultural economist.
Brink responded to the announcement yesterday that the Bank has further lowered its lending rate by 0,5% and the negative comments from some economists that the Bank has "lost a chance" by not lowering the interest rate even further and that it "has been slow to lower interest rates for a few years."
He says the unprecedented low demand in the economy and not the level of interest rates has long been the main problem why inflation is extremely low and the economy is not growing. The extremely negative influence of the Covid19 virus on the production value and profitability of all the industries on the supply side of the economy to make a greater contribution to growth is now destroying economic growth further.
The problem is not that interest rates are too high and that lower rates can in any way prevent deflation and low economic growth, for which there is no evidence in any case. The ever-increasing call on government is the urgency to lift the restriction due to the Covid19 virus in order to restore the supply and demand side of the economy and not to lower interest rates.
The continued delusion of the Reserve Bank and most economists over monetary policy clearly has no limits, while it does not play such an almost dominant role in the economy as they would like it to. Not nearly such an important role as the improvement in the production value and profitability of all industries in the primary, secondary and tertiary sectors of the economy and the increase in consumer disposable income through greater job creation, increases in salaries and wages, as well as lower taxes.
The Constitution prescribed the Reserve Bank's mandate in section 224(1) as the "protection of the exchange rate" (value of the currency) that replaced the previous mandate "to stabilise prices" in the interests of balanced and inclusive (formerly "sustainable") economic growth. This is nothing else but pure wishful thinking by economically illiterate politicians (and many economists) because the value of the currency, inflation rate and economic growth is determined by the demand and supply in the economy and not by interest rate changes.
There is no evidence that lower interest rates can stimulate economic growth! Even Statistics SA, which measures economic growth every quarter from the demand and supply side of the economy, has never even made any reference to the impact of interest rates on growth in its publications, precisely because it is negligibly small.
The Reserve Bank's own estimate is that a 1% reduction in the interest rate could make a 0,1% contribution to economic growth two years later, which in reality means nothing. The reason is that, like many economists and other institutions, they use a forecasting model that cannot consider all the variables that can affect growth. A thumb suck would be just as good!
According to some economists, a 1% cut in the interest rate will put R32 billion back into consumers' pockets. Total consumer spending was R3,1 trillion in 2019 at current prices, meaning that interest costs to the consumer amounted to only 1,05% of the total consumer spending.
"On the one hand, the Reserve Bank and most economists still cling to the delusion of the Bank's interest rate policy, but on the other hand they all accept Statistics SA's growth figures measured from the supply and demand sides of the economy."
Take a look at the latest publication of Statistics SA for the fourth quarter and 2019 growth figures at the following link:
http://www.statssa.gov.za/publications/P0441/P04414thQuarter2019.pdf
“Without the free operation of the market forces of supply and demand, the economy would not exist. Economic growth in South Africa will continue to be destroyed by the political interference of the government with totally excessive legislative regulation, as has been proven in the world for centuries by the various political systems,” says Brink.
