Tom Robbins says South Africa should abandon its “conservative monetary policy” (ie. using interest rates to counter inflation):

The UK and US have long abandoned conservative monetary and fiscal policy to fight the recession. This ironically leaves the South African government as one of the most prominent administrations in the world to hang on to remnants of Thatcherism or Reaganomics over the recession. There is fairly broad agreement that the West acted correctly to keep the banking system intact but the jury is still out on the merit of all the extra cash pumped into the economies (we will know the answer in about five years). Back in Pretoria, with Mboweni’s contract up and a confusing potpourri of cabinet ministers responsible for the economy, there is a perception that the contestation for economic policy is yet to be totally settled.

Obviously the central bank should be concerned with economic growth as well as inflation - which is why Mboweni has been cutting rates steadily for several months now, even though inflation remains worryingly high. However, the idea that South Africa should follow the American example of aggressively slashing interest rates is incredibly misguided, not least because this policy was partially responsible for creating America’s current mess. Richard Posner explains the causal connection between low interest rates and the US housing bubble:

As interest rates fall, borrowing becomes cheaper, and people borrow more and go deeper into debt, rather than saving. With more borrowing, banks need more money to lend, so they borrow too; as it is cheaper to borrow capital than to raise it by issuing more stock (because interest is deductible from income tax and the compensation that providers of equity capital to firms receive from those firms is not) banks become more indebted too, and hence more risky. And because houses are a product bought mainly with debt (for example, an 80 percent or 90 percent or even 100 percent mortgage), the demand for houses rise. So more houses are built, but in addition, because the overall stock of housing is so durable and is therefore not replaced frequently, the increase in demand pushes up prices. If nothing else besides low interest rates is pushing up housing prices, we have a bubble, in the sense that, as soon as the crutch of low interest rates is withdrawn, prices are likely to fall, as houses become more expensive to buy, the higher interest rates are. It was the collapse of the housing bubble when interest rates rose (mainly in 2005 and 2006) that started the economic collapse, and because banks were so heavily invested in housing through their role in issuing mortgages, they came near to collapse as well, triggering the depression.

The Federal Reserve pushed interest rates way down at the end of 2000 and kept them there until 2005 and during this period of low interest rates (in part of the period, the short-term interest was negative in real terms, because it was lower than the inflation rate). This was the decisive error that put too much risk into the economy, against a background of deregulation that allowed the banking industry to take whatever level of risk was profit maximizing given interest rates. The Fed was fooled by the fact that the usual indices of inflation, such as the Consumer Price Index, did not indicate a high rate of inflation. But the reason was that low-cost imports from China and other East Asian countries kept prices of most goods and services down. Inflationary pressures caused by an overheated economy flooded with lending were deflected into assets such as houses and common stocks.

I’ve been saying for years now that South Africa has structural problems with its economy. We went through a demand-driven boom in the 2000s, in which we achieved respectable (if not staggering) rates of economic growth, and the middle-class began to feel much richer. However, we allowed the country’s infrastructure to become degraded, we did not pay enough attention to productivity, and we did not create proper incentives for people to save, invest and produce more goods and services. This resulted in too much money chasing too few goods and services, which caused inflation, which has persisted stubbornly even as the economy itself has contracted. Radically cutting interest rates would be the wrong response to this problem: sure, we would have one last spending binge and keep the economy afloat for a few more years, but it would give the government an excuse to delay economic reforms, and eventually the resulting inflation would catch up with us and destroy any new wealth we created.