Inflation discipline ‘key' to economic stability, says economist
An economist says the South African Reserve Bank must keep its inflation strategy aligned with global standards to protect long-term economic stability and investor confidence.
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As the central bank moves to a new inflation target of 3% amid growing inflationary pressures due to the conflict in the Middle East, economist Chris Harmse warns hat weakening the target could expose the economy to currency instability and capital flight.“South Africa has to get its inflation rate, its inflation target in line with the global sector… if we keep our inflation targets lower and interest rates lower than the interest differential between South Africa and the rest of the world, the only thing that’s going to happen, we’re going to follow the Zimbabwe way, the rand will depreciate tremendously.”He says South Africa’s dependence on foreign capital makes inflation discipline essential. Without it, he warns, the country risks sharp currency depreciation and higher imported inflation.Harmse believes the Reserve Bank is correct to focus on price stability, as structural problems in the economy cannot be solved through monetary policy alone.“We are sitting with the structural problem in the economy now for 40 years already… we can’t expect monetary policy to structurally change the economy. It’s not their job. The job is on the fiscal side from the government.”According to Harmse, current inflation risks are mainly driven by external forces, especially oil prices linked to global conflict, rather than domestic demand.He explains that this creates a cost-push inflation environment, where households feel the impact through higher fuel and transport costs, rather than increased consumption.He further warns that if geopolitical tensions continue, inflation could remain elevated and force the Reserve Bank into sustained interest rate hikes.Harmse says rising interest rates potentially up to 100 basis points before the end of the year could significantly weaken consumer spending and strain household finances.He notes that higher fuel prices combined with loan repayments will reduce disposable income, especially for middle-income consumers.“If interest rates go up… consumer consumption may come down considerably. Those consumer companies… and some of the industrial companies definitely will experience a large decrease in their revenue.”On equity markets, Harmse says a higher-for-longer interest rate environment would likely hit consumer-facing and industrial stocks hardest, while financial sector resilience may not last if credit stress increases.He warns that if global oil disruptions persist, nearly all sectors on the JSE would eventually come under pressure.Despite this, he notes that South Africa’s currency stability and recent credit outlook improvements offer some cushioning compared to past global shocks.Harmse says while uncertainty remains high, policy discipline and external stability will ultimately determine whether South Africa weathers the current global “perfect storm” or faces prolonged economic strain.ALSO READ
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