There Shall be Work Xhanti Payi

THERE SHALL BE WORK BY XHANTI PAYI

LESSER OF TWO EVILS

123 R F/ro b o d rea d

W h at ’s concerning in the Reserve Bank’s decision to raise interest rates is that the threat of inflation is low The Reserve Bank’s decision last month to hike interest rates is not helping South Africans out of their misery

n 2013, an article in The

IWashington Post raised the question: what makes people more miserable — inflation or unemployment? Ithas occupied my mind ever since Reserve Bank governor Lesetja Kganyago’s announcement last month of an increase in interest rates.

Kganyago is often at pains to explain that the primary role of the Bank is to keep inflation low and stable. This, hes ay s , is for the benefit of the poor. But we’re living in times of extreme unemployment, so a supportive environment for investment, the opening of small

bu s i ne s s e s and consumption are important. This means the rates h i ke raises the question:which is more painful—high unemployment or high inflation?

In 2013, Dartmouth College pro fessor David G Blanchflower and others attempted to determine lev els of misery. In a paper presented at the Federal Reserve Bank of Bo s t o n ’sannual research confere nce , they introduced a “misery r at io ”to compare the awfulness of unemployment with inflation. Fo r this, they considered surveys of wellbeing across Europe to determine how bad people felt during periods of high unemployment and high inflation.

The outcome was that a “o ne percentage point increase in the unemployment rate lowered our sense of wellbeing by nearly four times more than a one percentage point rise in inflation”. Put more simply, they said, “u ne mp lo y me nt makes people four times as miserable [as inflation]”. Intuitively, this outcome should not be surprising: many of us would much r at he r have money for which we can buy le s s than no money at all. Considered this way, we should be more tolerant of inflation if it supports job c r e at io n .

But what’sconcerning in the Ba n k ’s decision to raisei nt e r e s t rates is that, by its own admission, the threat of inflation is low, even if inflationary risks have risen and “the level of policy accommodation remains high”.

Market economists have begun to predict an upward trendor “no r m a l i s at io n ”of interest rates. This will affect e co no mic growth and job creation. As the Bank fo r International Settlements showed in a paper evaluating the impact of monetary policy on the real sector, an indication of higher future interest rates negatively affects spend ing and consumption.

Earlier this year, the Interna tional Monetary Fundargued that central banks, in taking policy action, “need to explain how their actions may increase aggregate welfare by boosting the employment prospects of the poorest and reducing consumption inequality”.

This is not something that came up when Kganyago spoke. However, we do know he often says we can’t rely on monetary policy to improve aggregate welfare and boost employment, and that we need structural reforms instead.

Feeling the pain But monetary policy has a role in the success and effectiveness of reforms. In 2015, European Central Ba n k president Mario Draghi attempted to define the relationship between structural reforms, inflation and monetary policy.

He argued that “s ho r t - t e r m costs and benefits of reforms depend critically on how they are implemented. If structural reforms are credible, their positive effects can be felt quickly even in a weakdemand environment.”

He added: “Our a cco m mo d at iv e monetary policy [low interest rates to stimulate growth] means that the benefits of reforms will materialise faster, creating the ideal conditions for them to succeed.”

With the normalisation of rates lying ahead, monetary policy may not act in a way that will accen t u at e the impact of reforms.

Yet, as Kganyago noted in his address: “The July unrest, the pandemic and ongoing energy supply constraints are likely to have lasting effects on investor confidence and job creation, impeding recovery in labour-intensive sectors hardest hit by the lockdowns.”

Under these conditions, should SA really have to suffer the pain of inflation too? x

Payi is an economist and head of research at Nascence Advisory & Research