What could be done to reduce the burden of SA’s national debt and the dangers of the debt trap the country has entered? One obvious answer would be to borrow at lower interest rates. However, lower inflation would not necessarily reduce the interest paid on conventional RSA debt. Only lower expected inflation could do so. Lenders demand compensation in the form of higher interest rates for taking on the risk inflation poses to the purchasing power of their interest income and the market value of their debt. The more inflation expected the higher will be interest rates. The governor of the Reserve Bank believes lower inflation — the result of realising the Bank’s inflation target — will lead to lower expected inflation and bring interest rates down with it. But the link between realised inflation and expected inflation is not direct or obvious, as the recent behaviour of the bond market and interest rates confirms. In recent years inflation compensation in the RSA bond market — the d...

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