“Prediction is very difficult, especially if it is about the future” (Nils Bohr – Nobel Laureate)
Normally the market and economic commentators react favourably to interest rate decisions of the Monetary Policy Committee (MPC). The Reserve Bank, which houses the MPC, is one of the most admired institutions in the country.
The MPC’s decision to raise interest rates in November however drew a sharp reaction, and polarised opinion into two camps, both with strong arguments –
What can the recent rate increase tell us? Firstly, what those against the increase said…
The economy was either in recession or close to it when the decision was announced. This is contrary to mainstream economic thought as raising interest rates tend to slow down economic growth.
Secondly, inflation at 5.1% is well within the 3-6% band that the MPC targets. If you look at Shoprite, our largest grocery chain, more than 11,500 items in their stores are trading at lower prices than this time last year. Aligned to this is that the fuel price decreased by more than R1.80 per litre in December. The petrol price spreads its tentacles widely throughout the economy and this decrease will reduce cost pressures.
Consumer confidence has been dropping in recent months and a rise in borrowing rates will not help this.
Finally, the currency has shown strong gains over the past few months and thus the Rand needs no bolstering from an increase in interest rates.
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