SARB hikes rates. Growth vs Inflation

By Christiaan van Huyssteen (@cvh23)

From Business day:

THE Reserve Bank on Thursday increased interest rates by 25 basis points to 5.75% citing rising inflation concerns.

As was expected, interest rates were raised by a mild, and somewhat predictable 25bps.

The great balance that needs to be maintained is between growth and inflation, you want relatively high growth and relatively low inflation.

Unfortunately SA is in the awkward position of having relatively low growth, and relatively high inflation.

The Reserve Bank’s main policy tool is the interest rate it sets (the price of money).

The SARB can lower interest rates, which may result in growth, but can also produce inflation (as this results in more new money (credit) entering the system).

Here the SARB has decided to raise the rate, this won’t be good for growth, but it may be good for stamping down on inflation.

“The bank’s latest forecast, which assumes a speedy resolution of the metalworkers strike, sees growth in 2014 at 1.7%, compared with 2.1% previously and 2.8% at the beginning of the year. Growth forecasts for the coming two calendar years have been reduced to 2.9% and 3.2% from 3.1% and 3.4% respectively.”

In my view, our low growth is a result of our high inflation. Workers see the price of their shopping trolley contents going up faster than their pay cheques, and then decide to go on strike. It are these strikes which are hurting the economy by stifling growth. It appears that Mrs Marcus thinks that you need to tackle the inflation problem to solve the problem of low growth.

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