Reserve Bank interest rates wrecking the economy – economist

Economist Roelof Botha said the South African Reserve Bank’s (SARB) high interest rates are stifling investment in the country, hurting the economy.

Botha told Newzroom Afrika that the SARB’s Monetary Policy Committee (MPC) has unnecessarily raised interest rates to levels that are far too high.

In November 2021, the SARB’s Monetary Policy Committee (MPC) started its current hiking cycle when it noticed an upward trend in the country’s inflation.

Since then, it has raised interest rates by a cumulative 475 basis points, with the repo rate now at a 14-year high of 8.25% and the prime lending rate at 11.75%.

The MPC has said it will keep rates high until inflation sustainable comes down to the mid-point of its 3% to 6% target range of 4.5%.

The latest inflation print saw March’s CPI come in at 5.3%.

Botha explained that South Africa does not struggle with demand-side inflation, which makes the SARB’s high interest rates unnecessary.

In addition, South Africa’s economy is not similar to the US economy, and the SARB cannot simply target a specific inflation point. It should stick to keeping inflation within its current range.

He said inflated interest rates – like South Africa’s – act as a tax on venture capital.

“Right now, you can put your money in the bank and get between 9% and 10% interest on a fixed deposit, so why bother to start a new business and create jobs?”

Botha said that by lowering rates, the SARB would lower the cost of capital. This would incentivise businesses to invest more in the economy, creating jobs and growing GDP.

“All this economy needs right now is low interest rates and for the government to continue looking for the assistance of the private sector,” Botha said.

FNB economists recently warned of a potential double-edged sword for South Africa’s economy. 

They said that while inflation shows signs of peaking, cutting rates too soon could reignite inflation. 

However, the country’s high interest rates are squeezing consumers and slowing growth, potentially leading to a technical recession. 

The economists urged the SARB to find a balance between controlling inflation and preventing a deeper economic slump.