The current interest rate cycle has been more aggressive than predicted, with interest rates rising 425 basis points since November 2021. Despite the prime lending rate increasing from 7% to 11.25%, it appears to have had little impact on inflation, which remains well above the target of 4.5%. At the same time, higher rates are placing households and small businesses under significant financial pressure.
Load shedding is driving food prices ever higher, and the amount of money food producers and retailers are having to spend on alternative power is being passed on to consumers.“If you look at something such as stationery, the prices have increased by 10%. This is not being driven by demand, but by global inflation and a weaker currency,” explains Lings.“A store owner has a choice – either increase the price by 10% or stop selling [the item],” says Lings.
So why bother? One of the things interest rates do in South Africa is attract investments. Foreign investors looking for higher returns will watch the interest differential between countries.“If we lag behind our trading partners and other emerging economies when they are increasing interest rates, the rand weakens and we have imported inflation. So, interest rate hikes work, but for different reasons,” says Blount.
While everyone would love a large salary increase, higher salaries become a higher input cost for a company, which in turn drives up the cost of production – and therefore raises overall inflation levels. That then becomes a problem about fiscal stability, with worsening sovereign credit ratings and foreign investors becoming wary.