Typically, the objectives of macroeconomic policy are the attainment of full employment (or the reduction of unemployment levels), within an environment of low inflation, high and sustained economic growth, and a ‘healthy’ balance of payments. The emphasis on one or the other objective is a choice that is informed by a number of factors. Some of these may be informed by ideology, others may be the result of pressures external to the economy (especially for a relatively small, open economy like South Africa which is dependent on external financial flows and trade).

Some of these objectives (at least in the short to medium term) may be mutually exclusive. For instance, a low inflation (not factoring in inflationary expectations), high interest rate environment may negatively impact economic growth and employment levels. The opposite may also hold true.

There’s general consensus (and empirical evidence clearly upholds this) about the inverse relationship between the level of the interest rate and the rate of economic growth and the level of employment. Put simply, high interest rates lead to lower levels of economic growth and therefore lower levels of employment (or higher unemployment). High interest rates may attract speculative international financial flows, but these are generally fleeting and mostly do not lead to productive investments.

The current inflation target (range), with the resultant relatively high interest environment, is incompatible with the stated growth and employment objectives. In other words, the current monetary policy stance of the SARB harms the country’s growth prospects and is not supportive of the government’s stated growth and employment objectives. This is not an ideological. It is a view formed on the basis of the objective conditions and international empirical evidence. The apparent failure to realise that it is the contractionary policies of the SARB  which pose the largest domestic risk to growth, is puzzling as there’s ample theoretical and empirical evidence to suggest this. It is also unhelpful to talk about a ‘low-growth world’ as if this is a given, especially when there are countries that are growing at rates higher than the world average. Why should our growth aspirations be so low?

The government and the SARB should dispassionately and non-ideologically take stock of the situation and accept that they will not attain their growth and employment targets with the current policy incompatibility. It is inconsistent to persist with an inflation target range that clearly is at odds with the growth target and the creation of employment. What compounds the situation is the observed unstated goal of the SARB to target the median of the range. What is the point of the 6% upper limit if the SARB conducts policy in such a way that the rate of inflation is generally restricted from testing this upper limit?

I would argue that low growth is the most pressing challenge for South Africa as most other economic, social and political challenges flow from it. The reduction of unemployment, and not a low rate of inflation, should be the key objective of macroeconomic policy in the short to medium term. This would have a positive impact on the budget deficit through reduced social spending while revenue collections increase. This would allow the government space to increase spending on growth enhancing items like education, even as the number of those who cannot afford fees reduces (or they require a lower ‘subsidy’). In other words, creating a ‘virtuous circle.’

Clearly, this macroeconomic policy has to be complemented by strategies implemented by government and the private sector to ensure that growth is in sectors with the greatest employment creation potential. In other words, avoid the curse of jobless growth.

It is interesting to note in passing that the (cost of living components of) wages demanded by unions, particularly public sector unions, clearly indicate that their inflationary expectations are high. This is puzzling as the SARB has maintained consistently low and relatively stable rates for a long time.