The announcement by the South African Reserve Bank (SARB) of the 50 basis points increase in the repo rate, came as a surprise. But it was inevitable. The SARB has been running an exceptionally loose monetary ship for many years – something that will eventually end. And the sooner you start your tightening cycle, the less you need to do over time and the less painful the process will be.
Clearly the recent bout of weakness in the currency contributed to the sharp deterioration in the inflation outlook, and by increasing interest rates the SARB will put even more pressure on a beleaguered consumer in order to attempt to prevent inflation from spiralling out of control. It is, however, unlikely that the rand will benefit from this rate rise. In fact, the rand may even depreciate more as growth prospects also come under pressure.
So don’t blame the SARB. They have been very kind to us in the past few years. Now the time has come for the other role players in the economy to do their bit. Consumers will have to start living within their means and that also applies to the state. In fact, the rate hike will make life a little more difficult for the minister of finance. And inevitably the economy will also be affected – expect another weak GDP year for 2014.
But all is not lost. By raising rates now, and probably again over the next few months, the SARB has started a process that would have happened anyway. Increasing interest rates will likely harm economic growth this year and probably next year as well, but a stronger and more sustainable foundation is being laid for future economic growth.
Sometimes you have to be cruel to be kind – don’t blame Gill.
Dawie Roodt is the Chief Economist of the Efficient Group
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