The monetary system is in a very dangerous place, according to Reserve Bank Governor Tito Mboweni. Briefing Parliament's finance committee on Tuesday he pointed out that the rate of inflation has now crossed the repo rate, and a narrow interpretation might be that interest rates are on the point of becoming negative in real terms.

“A hard line monetarist would say that our repo rate is much too low,” he said.

He added: “The argument that we have high interest rates doesn't hold. We are running the risk of negative interest rates”

High rate argument

“If you give a narrow interpretation of what real interest rates are it shows we might be going into negative territory,” Mboweni said. “The argument that there's high interest rates doesn't hold. If you look at the technical issues it doesn't hold.”

He agreed that there are different measures of what real interest rates are, including inflation expectations. “But narrowly,” he said, “it might mean we are running the risk of negative interest rates. That's not good for investment as you know.”

Mboweni also said he is still concerned about global financial stability. Its origin was in the US housing market, he said — “but the situation's getting worse”.

He said: “That problem has not gone away. Therefore our colleagues have had to intervene in the money market in order to facilitate the continued smooth running of the banks. We have not seen the last of this and it is of concern,” he said.

He said that the arguments about 'moral hazard' and 'lender of last resort' and text book issues like that have been challenged to the core.

Banks out of collateral

“Most banks have run out of collateral as we know. The thing that is in the banking text books is out of the window. The key issue is how to keep the banking system going.”

The governor also stressed that the rate of inflation is still of concern.

“Even when we exclude food and energy the inflation rate is still 7.4 percent,” he said. “Anybody who goes around arguing that these are just exogenous shocks is not arguing from an educated point of view. You must say lord forgive them for they know not what they are saying. It is not true.

“I know facts are confusing to other people, but we operate on the basis of scientific facts.”

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