Is Monetary Policy Conduct 2020 – 2022 cycle causing more harm?

A group of workers are seen cleaning up the 150m high South African Reserve Bank, which is recognised as the tallest building in Pretoria and fifth in the country, Picture, Phill Magakoe.

A group of workers are seen cleaning up the 150m high South African Reserve Bank, which is recognised as the tallest building in Pretoria and fifth in the country, Picture, Phill Magakoe.

Published Jun 7, 2022

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By Prof Johannes P S Sheefeni

Monetary policy is described as the macroeconomic policy set by the central bank.

Although there is a variety of monetary policy instruments that the monetary authority can use to fulfil this policy act.

The most common monetary policy instrument used is the interest rate better known as the repo rate.

This is the rate at which commercial banks can borrow funds from the central bank.

When the Covid-19 pandemic translated into an economic threat, most central banks around the world responded by effecting expansionary monetary policy meaning lowering the repo rates.

This act of lowering interest rates by central banks translated into lower lending rates by commercial banks which has a positive spin-off effect on the consumers and businesses in terms of repayments.

This provided relief to the consumers to allow them to manage their finances given the circumstances.

This conventional monetary policy conduct was applauded by the economic agents (households and businesses).

Furthermore, other countries employed additional unorthodox monetary policy.

There were predictions that as economies start to move back into some kind normalcy, interest rates will increase.

In fact, some economist coined the concept of “interest rate normalising” or “monetary policy normalisation”.

In a layman’s term, monetary policy normalisation simply means monetary contraction while minimising or gradual withdrawal of the unconventional monetary policy measures.

Although there were prediction and anticipated interest rate hikes in 2022.

It was not expected to move at the pace it is happening. It is as if the positive effect resulting from monetary policy expansion since 2020 were reversed by the current monetary policy contractions, before they could be fully experienced.

Of course, as it was in the case of unanticipated COVID-19, the inflation that the whole world is experiencing was not anticipated either and it triggered rise in interest rates around the world.

Usually, the culprits for causing inflation are increases in money supply which luckily it is not case this time around. The COVID-19 pandemic disrupted all countries’ national development plans and agenda for 2020 and beyond.

This affected the lives and livelihoods to a large extend. In the same vein, the continuous rising of interest rate by Central banks globally might results in the same economic problems than its intended purpose of combating inflation.

This is due to the mere fact that the consumers and businesses ends up bearing the blunt of high costs associated with high lending rates.

This might further lead to defaults on the loans or credit extended. It is in light of the above that these developments requires the monetary authorities to be more creative and probably use more unconventional monetary policy instruments to combat inflation.

At the same time this act will also stabilise the macroeconomic foundations in the economy.

Prof Johannes P S Sheefeni works at the Department of Economics, University of the Western Cape.

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