COSATU statement on the South African Reserve Bank’s decision to increase the interest rates  

The Congress of South African Trade Unions (COSATU) has noted with deep disappointment, the South African Reserve Bank’s decision to increase the repo rate by 50 basis points in response to the rising inflation levels. The Federation while acknowledging that price stability is important, we feel that for an economy that suffers from large external shocks, depressing demand through interest rate hike does not make sense.

Using the interest rate when the main driver of inflation is not demand but rather the sky rocketing oil prices, which translate into high food prices, commodity prices and speculative exchange rate fluctuations alone will not help the situation.

This decision reflects the extent to which the Reserve Bank takes economic growth to account in its decision-making. A narrow focus on inflation is always guaranteed to result in interest rate and output volatility.

This will worsen unemployment and will continue to constrain fiscal policy because it will lead to a decline in output as a result of high borrowing costs, therefore, cutting the tax base.

Inevitably, this will put a strain on the budget by increasing the interest burden and raising the primary deficit. Public debt will continue to explode, forcing fiscal policy to be contractionary, which means running a balanced budget or surplus budget by cutting government expenditure.

Monetary policy must support an expansionary developmental fiscal policy stance: In this growth path, the central bank policy cannot be independent of fiscal policy actions, and it must conduct its activities in a manner that supports the stance of fiscal policy.

The operational mandate of the Reserve Bank should therefore be altered to move away from the current inflation-forecast targeting framework. Instead, a more dynamic and broader framework that considers fiscal sustainability, the sustainability of the external balance, the path of unemployment reduction and price stability should be considered as a package.

This can only muddy the waters when it comes to the current wage negotiations because workers will be forced to factor these exorbitant and unreasonable interest rates in their negotiations.

The Federation continues to argue that the Reserve Bank must pay primary attention to the cycle and long-term trend of employment growth. COSATU wants a greater weight to be placed on employment fluctuations, but this does not mean that price stability is not considered, but it means we need an appropriate trade-off between inflation, the cost of borrowing to industry and unemployment.

Monetary policy must also be supportive of industrial policy. The manipulation of the interest rate with the hope that financial markets will achieve the restructuring of the economy is grossly inappropriate and inadequate. Instead, quantitative control measures on the financial system, more than interest rate manipulation will have to be applied in order to support changes in industrial structure.

There is a lot that government can still do at a macro level to cushion South Africans from this crisis. There is an urgent need to move the country away from being overly dependent upon the ever increasing and volatile international oil prices and other factors spurring inflation.    

COSATU has always been vocal on the need for a fuel cap in cases when the fuel prices continue to rise. Fuel caps are realistic, beneficial, feasible and easy to implement to protect financially stressed workers and the poor.  The short-term relief cushioning South African consumers from volatile prices will expire soon and will likely be followed by a steep fuel price increase, therefore, government needs to intervene again. 

Government needs to finalise an overhaul of the fuel price regime and place the Road Accident Fund (RAF) on a sustainable trajectory.  The RAF is the state’s largest liability at nearly R400 billion, after Eskom.  A large proportion of the fuel price regime is to fund a bankrupt RAF.  Government needs to reintroduce the RAF and RABS Bills at Parliament which will help reduce the bleeding at the RAF and place it on a sustainable path.  

Minister Mbalula also needs to get all Metro Rail lines operating again.  This is the most effective and affordable way of moving mainly urban workers from cars and off the roads into a more affordable public transport. The Department must implement the integrated public transport plan so that more workers can opt to use rail as opposed to other methods of transportation.   

There is an urgent need to finalise Eskom’s debt relief package.Reducing Eskom’s unbearable debt burden of R400 billion to a more manageable level of R200 billion will ease its financial crises and thus remove its need for constant above inflation and double-digit tariff hikes.  It will enable Eskom to focus on maintenance and investing in new generation and reduce load shedding.  This will help the economy to grow.  

South Africa also needs to drastically increase local manufacturing and the buy local campaigns.This will lessen our dependency on imported goods, reduce consumer inflation, protect, create local manufacturing, and value chain jobs. For decades now, the COSATU and its Affiliates have called for focused measures to increase employment on a mass scale through manufacturing and other identified potential growth sectors. The country cannot afford to fold its arms and accept our status as importers of unfairly imported manufactured goods that are subject to geopolitical instability. No nation has ever developed its economy and population by making itself the dormant recipient of finished goods from other countries   

The Reserve Bank needs to master the balance of maintaining inflation-targeting, protecting the value of the rand, living standards and the value of investment capitals, whilst still prioritising employment. The current situation needs imaginative and bold leaders at all levels if South Africa is to survive the global uncertainty and escape the current economic stagnation.    

 Issued by COSATU

Sizwe Pamla (Cosatu National Spokesperson)    

Tel: 011 339 4911
Cell: 060 975 6794