Yes, if used to combat inflation, suggests the Tamela team in this month’s article outlining the South African Reserve Bank’s (SARB) approach…
In July 2023 the Governor of the SARB, Lesetja Kganyago, announced a pause in interest rate increases following 10 interest rate hikes in a row. The series of hikes was in response to continuously rising inflation (with CPI peaking at 7.8% in July 2022) and in the execution of its constitutional mandate of protecting the value of the Rand by keeping inflation low and steady.
To counter inflation, the SARB has previously used contractionary monetary policy (interest rate increases) and the Bank stuck doggedly to its mandate in this respect. However, notably, it has commented on the need for economic growth stimulation using tools such as structural reforms, and deregulation of the nation’s transport and electricity sectors, which lie outside of its domain.
Borrowing money becomes more expensive as interest rates rise, making it especially difficult for businesses to borrow cash for expansion, which would unlock economic growth and create jobs in a substantially unequal economy. The rising interest rates are meant to combat inflation. However, in the current environment where people are cash-strapped and businesses are struggling, increasing interest rates may dampen much needed economic activity.
Consumer inflation finally retreated to 5.4% in June 2023, down from 6.3% in May of 2023, providing much-needed respite to consumers. In a statement released on 20 July 2023, where the Monetary Policy Committee kept the repurchase rate unchanged at 8.25%, the SARB noted that headline inflation has been primarily shaped by cost-push inflation contributors.
As a result of the ongoing load shedding, businesses are suffering additional costs in obtaining alternate energy sources. In addition, the cost of transporting goods is rising due to the logistical problems that South Africa faces and electricity price increases and other administered price hikes continue to negatively impact business. The aforementioned difficulties have increased production costs, which are often passed on to customers, resulting in rising prices.
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