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Why did the repo rate rise?

Earlier this week the South African Reserve Bank decided to raise the repo rate to 6.75% according to Cape Talk.

Sarb Governor Lesetja Kganyago said that he might hike it further to curb the impact of rising fuel prices.

The repo rate is generally used by the reserve bank to get inflation into the target bracket of three to six percent.

ANA (Via IOL) reports that FNB’s chief executive Jacques Celliers said the move was necessary to protect consumers from higher inflation, however according to EWN Consumer Price Inflation rose to 5.1% in October, which is well within the brackets.

Rand weakness was a major contributor to this, and the rand strengthened in anticipation of the hike.

In the second quarter of this year, South Africa entered a recession, and our unemployment rate is at 27.5%.

My Take

What exactly was the rush to hike here? Inflation is well below its upper target, and we’ve got a very shaky economy, why are we engaging in contractionary fiscal policy?

We want more demand in our economy because that drives higher production and might actually do something about our high rate of unemployment, even going with supply side economics we want more local investment which now costs more to do.

Inflation targeting is to my mind, a bad idea given our economic position. Our population is very young and we need rapid growth which would cause higher inflation because as more people get more money the price of goods has more room to grow because buyers can afford that growth in prices.

If your prices are too high for the market to bear, your business suffers. Witness Woolworths, in July IOL reported that its profits had plummeted by 20%.

Now obviously there are other problems, Listeria aside Woolworths has suffered from uninspired and boring management when it comes to their stocking and deciding what to put on special. Generally the samples they put out have about as much relation to their specials and their new products as their magazine does, none.

Seriously, they’re funding a food magazine, which they give away for free to their cardholders, and half the time the recipes include stuff they don’t stock. What’s the point of advertising a product you don’t sell?

But the core problem really is that the market isn’t bearing their prices, so fewer people are shopping there and they’re ending up making losses on stuff which, if they cut the prices by about 10% they’d be making a profit on.

If our economy recovers, people will be more willing to pay Woolworths prices, which means higher inflation.

You want to know why our economy has been so stagnant for so long? There’s  your answer – when the economy starts to recover inflation goes up, measures are taken and the recovery stalls.

But even leaving my opposition to inflation targetting aside, I don’t see the case for this hike. The upper bound is 6%, we’re still well off of that, so why hike?

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