The South African Reserve Bank has elected to keep the repo rate at 6.5%.
The bank was concerned about the economy entering recession, and it has dropped its gross domestic product (GDP) growth forecast for the year down to 0.7%.
It had previously forecast growth at 1.2% in July.
According to the bank, since the July monetary policy committee meeting, the rand has depreciated by 7.3% against the dollar, and they expect it to remain volatile due to tight market conditions and investors being a bit iffy about emerging markets.
In terms of headline inflation, they expect it to average at about 4.8% in 2018, average about 5.7% in 2019, and go down to 5.4% in 2020.
Raising interest rates was probably not an option right now given how the economy is in pretty bad shape.
According to Stats SA unemployment is at about 27.2% as at the second quarter of 2018.
In order to make inroads into this we need GDP growth of about 6% a year for the next 20 years according to Business LIVE.
Raising the rates wouldn’t have made much sense, given that inflation at the moment isn’t being driven by local demand. You can see this by looking at our debt to income figures going back to 2008 – South Africans just aren’t spending as much.
So would lowering interest rates do anything for us?
SARB is constitutionally forced to maintain a policy of inflation targeting, requiring us to keep inflation inbetween the 3% to 6% band, and according to their projections in the second quarter of 2019 they expect inflation to hit a high of 5.9%, perilously close to that top bracket.
Now personally I think inflation targeting doesn’t make sense in a young country with high levels of personal debt that is seeking to redress past economic wrongs. If you’ve got high inflation the value of your savings is going down, but so is the value of your debt.
That said the reserve bank is legally bound to keep inflation under 6%, so it can’t lower interest rates and risk going over that.
So far as I can see the decision is probably the best that SARB could come up with, without us having to have a constitutional amendment to allow them greater flexibility in how they handle these things.