Hiking SA interest rates will make the economy worse

Consumers are in for further disappointment later this month (26 – 28 January 2016) when the members of the Monetary Policy Committee (MPC) convene to discuss interest rates.

A number of analysts predict that the MPC will hike the repo rate by 50 basis points (bp) to 6.75% in January, with further increases anticipated during the course of the year, as the government attempts to stabilize the rand, and prevent a recession.

Brian Kantor, chief strategist and economist at Investec Wealth and Investment however, questions the relationship between interest rates and a weaker currency, while he argues that higher interest rates will only serve to slow the economy further.

The country managed to narrowly avoid hitting recession in 2015, having come close in the third quarter when economic growth slowed to 0.7% following a contraction of 1.3% in Q2.

“They (MPC) have had (and will have) as little influence over its direction as you or me,” Kantor said in an article on Biznews.

The Reserve Bank began a rate hiking cycle in January 2014 and since then, the higher the rates, the weaker the rand has been, the analyst said.

“It is very hard to argue that the rand would have been any weaker than it is now, had interest rates remained on hold over this period.”

He said that monetary policy settings will not make much of a difference to perceptions of fiscal policy.

“They can make a difference to the state of the economy with their interest rate settings. Slower growth makes the task of funding the fiscal deficits even more difficult. They will not be doing Gordhan or you and me any favours hiking interest rates,” Kantor said.

The analyst warned that slower growth, would mean even less reason foreign and domestic owners or managers of capital have to invest in South Africa. Growth expected leads the capital flows that determine the value of the rand, he said.

Kantor said that the country should be taking advantage of a weak rand, by exporting more and attracting foreign tourists.

More on interest rates

South Africans will not stand for VAT hike in 2016: economist

Outlook for SA consumers dire in 2016

South Africa on the edge of a recession

How the rand crisis and a rate hike will impact you