Drastic measures is now required from the Reserve Bank. Photo: Bongani Shilubane/African News Agency (ANA)
Drastic measures is now required from the Reserve Bank. Photo: Bongani Shilubane/African News Agency (ANA)

OPINION: Radical interest rate cut now required

By Corrie Kruger Time of article published Mar 16, 2020

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JOHANNESBURG -  Drastic measures are now required from the Reserve Bank.

South Africa was already in a recession before the Coronavirus had any significant impact. Coming from a low economic activity base we need to minimise the impact of further declines to prevent the country of sliding into a depression.

President Ramaposa reverted to words such as war in his speech on Sunday night. Let us revisit the period 1941–1951. That is the correct way to describe the command structure now required to tackle the issues.

The Great Depression took place over the period 1929–1941. The longest and deepest downturn in the history of the United States and the modern industrial economy lasted more than a decade, beginning in 1929 and ending during World War II in 1941.

The Federal Reserve pegged interest rates at a low level during World War II in order to facilitate the financing of government debt and enforced that peg for six years after the war’s end. Just as it had in World War I, in World War II, the Fed pegged interest rates at a low level in order to facilitate the financing of government debt. As was the case after World War I, the Treasury enforced that rate peg well after the end of the war. The Fed struggled internally about whether to challenge the Treasury over its subservience. 

Resolution replaced indecision in fall 1950 with the entry of the Chinese into the Korean War and the belief in the imminence of World War III. But that is not at issue now although we can expect some more unpleasant surprises as we move along.

What can we expect from the bank’s monetary committee meeting that will take place this week?

No doubt one eye will be on Moody’s grading that may reduce our Debt to Junk Bond status. There is a saying ‘buy on rumour, sell on fact’. In this regard I believe much of the impact of a Moody’s downgrade is already priced into our markets. Another eye will be on the already weakening Rand that have slumped as investors flee riskier assets. But we need more eyes. We have an already high unemployment rate, we are staring down the barrel with more job losses emanating from the Steel industry, bloated government positions and salaries and failing SOE’s, SAA will lay off workers, so will Telkom. And we have not even touched on the huge surplus work force at ESKOM.

We are looking at reduced income in the events management business, reduced income from activities relating to both imports and exports. There would be a huge impact on the mines, the tourism industry, the entertainment industry, the banks will need to look at increasing bad debts and the domino effect will leave as all in a much worse place. Financial markets and investment returns will add pressure to our economy. We need to avert a depression. Much of business is dependent on loans and servicing high interest loans should not be allowed to continue to destroy over indebted government, consumers and companies alike. 

Some commentators advocate a 25 basis point cut in interest rates. That, in my opinion, is way too little to have any meaningful impact. We are forever looking at the concept of redistribution of wealth in South Africa, yet we have high interest rates to compensate the Capital providers. The USA cut their interest rates from 1,75% with 50 basis point. If we wish to follow that drastic measure we need to lower our interest rate by 150 basis points. (Their cut is in excess of 25% of the nominal interest rate) Should South Africa do that, it would be an unprecedented move. However we are in unprecedented territory at the moment. And in desperate times it calls for desperate measures, this has been true for many centuries as per the Latin saying, "extremis malis extrema remedia," which appears in print as early as 1596;-Wiktionary. This is not business as usual time. The European Central Bank (ECB) The ECB’s deposit rate — which is the interest that the central bank provides to financial institutions that deposit cash at the ECB — stands at -0.5%. The negative rate is meant to spur banks to loan money rather than park it at the central bank. These counties are almost at full employment yet our interest rates are sky high. This is a good time to re-think.

My sincere apology to all holders of capital, the earning capacity on surplus funds will have to wait for another economic cycle but for now I believe the party is over. Who knows, ten years from now all will be forgotten and we can go back to a high interest rate environment. We are after all trying to be a developing country.

Corrie Kruger is an Independent Analyst.

BUSINESS REPORT ONLINE 

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