MONETARY POLICY
Is Kganyago’s rate hike a dreadful mistake?
The rand’s behaviour is the main determinant of our inflation rate — but the Reserve Bank is fooling itself if it thinks it can have a positive impact on the currency in any easily predictable way
Reserve Bank governor Lesetja Kganyago accepts that the economy is in dire straits. However, in seeming disregard for the severity of the problem, the monetary policy committee on May 25 unanimously ordered a further 50 basis point increase in short-term borrowing costs for mortgages and overdrafts.
The governor justifies raising interest rates in a distressed economy as part of a “no pain, no gain” regimen. He argues that though increasing interest rates may have a negative impact on the growth rate of the economy in the short term, in the longer term his actions will lead to low and stable inflation rates; these will, in turn, embed expectations of continuing low and stable inflation rates into the future. His implicit assumption is clearly that the latter will outweigh the former. ..
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.
This article is free to read if you sign up or sign in.
If you have already registered or subscribed, please sign in to continue.
Questions or problems? Email helpdesk@businesslive.co.za or call 0860 52 52 00.