US Federal Reserve Chairman, Jerome Powell’s announcement of a 75-basis point hike in the key US interest rate denotes that central banks are finally dispensing the bitter medicine to bring inflation under control. I would argue that the Fed has been behind the curve in not anticipating a more sustained period of inflation, nor indeed the rapidity and intensity of the upward curve. This is borne out by the fact this week’s interest rate hike is the highest in almost thirty years. This is a lesson to us all about complacency, combined with conceptual and institutional inertia. Simply because central banks have more or less got it right for the past few decades (even during the global financial crisis of 2008 and indeed in response to the Covid-19 pandemic economic lock-downs), this does not translate into omniscience.
Monetary policy committees, whether in the US, Europe, Asia or South Africa rely on available data, past experience and future modelling, yet all of this amounts to imperfect knowledge. Moreover, like it or not, and despite their constitutional and legal mandates, reserve banks are not insulated from the social, economic and political pressures of the jurisdictions in which they operate. The most obvious contemporary example of this is Turkey in which political interference has resulted in no interest rate hikes for five months, a 73,5% inflation rate, the Lira trading close to an all-time low against the greenback and food prices doubling over a year. To add insult to injury, in this period of heightened fuel prices, the price of petrol at the pump has risen three times in Turkey this week alone.
While we are nowhere near the hyperinflation (defined as a greater than 50% monthly increase), experienced by Zimbabwe and Venezuela in recent decades, the ‘post-pandemic’ wave of inflation is proving to be more sustained than many leading economists had forecast or wished for. While there are always winners in an inflationary environment and indeed mild inflation can be good for economic growth, it is often the poor and financially vulnerable that pay the highest price in real terms. An inflationary environment often tips financial vulnerability into a vicious cycle of more expensive borrowing, which, in turn, dampens economic activity and growth, sharpens inequality and deepens poverty levels.
Given the extraordinary set of threats emerging from Russia’s war in Ukraine, from higher energy shocks to further supply chain disruptions and grain shortages, high inflation poses a particular corrosive threat to global economic recovery. This toxic cocktail presents us with a unique set challenge not previously experienced by this generation policy-makers and any ‘over-reaction’ by central bankers holds the very real possibility of plunging economies into recession with resultant stagflation. But the current un-chartered territory also presents an opportunity for the private sector to work with government policy-makers to forge new ways of stimulating economic growth and recovery.
This is a message to South African policy-makers too, as creeping inflation throttles economic recovery. Economic and monetary policy may be the legitimate preserve of Treasury and the Reserve Bank, but economic recovery, sustained growth and job creation is driven by the private sector. We can’t’ achieve this under conditions of siloed isolation, so let’s get the social compact rolled out and lead globally rather than follow.