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Wednesday, August 17, 2022

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Higher interest rates is not a solution

Outside view building of South African Reserve Bank in Pretoria. Picture, Bongani Shilubane, African News Agency.

Outside view building of South African Reserve Bank in Pretoria. Picture, Bongani Shilubane, African News Agency.

Published Jul 19, 2022

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By Fanie Brink

The Reserve Bank will tomorrow, just like the US Federal Reserve, European Central Bank and other central banks in the world, again totally ignore the operation of the market forces of supply and demand when they increase their interest rates further.

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They will force the international economic into a serious recession.

The central banks believe that interest rates are a much stronger market force in the economy than the forces of supply and demand that can never be correct or true.

Can the Reserve Bank tell us what the influence of increases in interest rates is on the demand in the economy if the interest costs that consumers pay are not more than two percent of their total private consumption expenditure? Or if it has such a low weight that it does not even appear on the list of consumer items that Statistics SA uses to compile the

Consumer Price Index?

It is at best negligibly small.

Can the Bank also tell us what the influence of higher interest rates is on the supply-side shocks in the economy in terms of the higher fuel, food and fertiliser prices due to the war in the Ukraine?

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The answer is exactly nothing because the Banks have absolutely no control over the supply side of the economy which is the single biggest reason for the latest higher inflation rates in the world.

They believe that punishing the consumers on the demand side of the economy with higher interest rates for price increases that they are not responsible for will also solve the serious problems on the supply side.

Do the Banks perhaps have any scientific evidence that the changes in the inflation rate can be explained by the changes in interest rates? It does not exist

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Worldwide recession

The Banks are in the process of pushing the economy into a serious worldwide recession by further increasing their interest rates as the chairman of the US Federal Reserve has already said it’s not afraid of pushing the economy into a recession to stop inflation Totally ridiculous.

The inflation rate is determined by all the local and international political and economic factors that have an influence of the supply and demand of goods and services, as well as on the value of the currency and economic growth.

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The inflation in the world will decline again when the war comes to an end and the fuel, food and fertiliser prices will return the normality while the Banks will then, as in the past, again go on a long ego trip about how well their interest rate policy has curbed the inflation rate says Brink.

Fanie Brink is an independent agricultural economist.

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