Sarb flags inflation as major risk to domestic financial system

Says stagflation fears could exacerbate inequality and slow growth.
Image: Moneyweb

South Africa’s central bank said on Wednesday the risk of a spillover of the Russia-Ukraine war could hurt the country’s financial stability through rising food and fuel inflation, lower economic growth and high unemployment.

Emerging markets have been unduly impacted by the Russia-Ukraine crisis through increases in the price of oil, gas, wheat and other grains, forcing central banks to tighten monetary policy even at the risk of undermining economic growth.

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South Africa’s central bank last week increased its prime lending rate by 50 basis points to 4.75%, its highest increase in six years, to rein in inflation.

In its biannual health check of the financial system, the South African Reserve Bank (Sarb) said that while the financial system of Africa’s most advanced economy was “resilient”, stagflation fears could exacerbate inequality and slow growth.

“South Africa remains vulnerable to spillover effects of global events, particularly the Russia-Ukraine war and global stagflation concerns,” it said, adding that it could also disrupt social stability.

Stagflation is characterised by a prolonged period of high inflation, lower economic growth and high unemployment.

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The Sarb said in 2022 it will set up a deposit insurance company which would insure deposits of almost 90% of depositors with a proposed coverage level of R100 000.

It flagged concerns that rising inflation and inequitable growth could lead to more incidents of social unrest like the one seen in July last year.

The Sarb also pointed out climate risks to the country’s insurance industry, which is still reeling from the April floods which killed 448 people, adding that it could increase the cost of insurance as such calamities become more frequent.

Rising government debt, any emergence of a new and more deadly wave of Covid-19 and rising cyber attacks also pose risks to South Africa’s financial stability, it said.

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the reserve bank has just raised interest rates

We have no asset inflation and the economy is frigid rather than overheated. We have inflation that is caused by externalities the economists at the bank cannot manage. They can add 5% and it will make absolutely no difference at all other than increasing inflation even more.

All they have managed to do is make new investments tougher and the carry trade more attractive = artificially inflate the runt value at the cost of our only strong weapon : exports.

Supply shocks and inflation are different animals. Supply shocks cannot cause inflation, but currency debasement does. When the price of wheat and cooking oil skyrockets, consumers have to cut back on meat and veggies. The combined price of a “basket of consumer goods” can only rise if an increased supply of currency chases after the same amount of goods.

While adverse weather, lockdowns, and wars can cause supply shocks, only Reserve Banks can cause inflation. That brings us to the point – inflation is the preferred method by which highly-indebted governments default on their debt, and by which Reserve Banks confiscate the purchasing power of citizens to prop up the banking system.

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