The African Development Bank’s former chief economist Professor Mthuli Ncube has raised questions about South Africa’s current monetary policy approach; warning that recent interest rate hikes could prove ineffectual should the prevailing growth concerns result in lower investment levels and/or the country being downgraded to junk.

Speaking at the Wits Business School in Johannesburg this week, Ncube, who is currently professor of public policy at the University of Oxford’s Blavatnik School of Government, expressed unease with the South African Reserve Bank’s (SARB’s) further tightening stance.

The SARB raised interest rates by 25 basis points to 7% in March, owing primarily to concerns over rising inflation, itself spurred by a weaker rand and higher food prices. Consumer price inflation surged to 7% in February, its highest level since June 2009. However, the rand had also recovered materially since the March interest-rate hike.

Ncube argued that, in setting rates, the authorities needed to take account not only of the inflation and output gaps, but also financial stresses arising from the international environment.

He makes extensive reference to these stresses in his latest book, titled ‘Global Spillovers into South Africa’, in which he outlines which global spillovers have the biggest influence on domestic growth.

The book shows, for instance, that Italy had been a consistent drag on South African growth before and after the 2009 recession, while the UK had been the main contributor to the actual recession. In addition, the US, China and India had a far greater influence on South Africa’s economic performance than did either Russia or Brazil.

However, Ncube also stressed that domestic shocks were as important as global ones and that local factors were currently having a greater influence on the outlook for the country risk premium than the global spillovers. 

Ncube said he was unsure that the SARB’s decision to hike rates in March was a correct one in light of “some of the stresses that still persist”, such as the slowdown in China, the fall in commodity prices the threat of a ‘Brexit’ from the European Union. “I think there is still a strong case to keep easy monetary policy,” he asserted.

“The problem is that, when growth slows down quite sharply, it cannot be the type of environment that attracts foreign direct investment or capital. On the contrary, weak growth can lead to an even weaker rand.”

In such a context, interest rate hikes would be unable to stop the rand from sliding, particular when weak growth was couple to other political risks, which had increased in recent months.

“My message for South Africa is to let the rand find its level. Let’s do whatever we can to keep growth going, to make sure there is confidence domestically and for foreign investors.”

Ncube stressed that South Africa’s policy response at the early stages of the global financial crisis – of lower interest rates, a slightly wider Budget deficit – had been convincing.

“I’m less convinced now about the domestic policy response to the shocks, because the shocks are still there globally. But now with domestic shocks, monetary policy is having to accommodate for political shocks and I’m not sure it will be successful.”

The country’s weak growth prospects and its political climate would be central to the upcoming assessments of the ratings agencies. “These things feed into each other, because once there is a further downgrade, then there is less FDI and portfolio flows  . . . and the cost of borrowing will also rise.”