The South African Reserve Bank (SARB) has hiked the interest rate by another 75 basis points. The repo rate will now increase to 6.25%, and the prime rate to 9.75%, from 9%. This is like pulling the handbrake on the economy. It will also have devastating consequences for the heavily indebted majority.
More cash-strapped South African consumers will fall into arrears on their home or vehicle loans when they now have to pay more. Small firms who are indebted will come under pressure. The rate hike will exacerbate unemployment, hunger and inequality. Deep austerity and hawkish interest rate hikes will deepen our recession.
Inflation in SA is driven by external factors, not by domestic consumption. It is not driven by exaggerated investment programs which ‘overheat’ our economy. The situation is the absolute opposite. The interest rate hike is made to the benefit of the finance industry and to help strengthen the value of the rand against major currencies, such as the US dollar. There is no guarantee that the diesel and oil prices will not increase again. Will the SARB again answer with new rate hikes? In short: The government and the SARB are driving the South African economy and society closer to collapse without exploring credible alternatives.
There is no shortage of alternatives to interest rate hikes as a means to mitigate against rising inflation. One such alternative is price control of all necessary food and household items. The big supermarkets, Pick N’ Pay, Spar and Shoprite will have to reduce their profit margins, instead of issuing dividends to shareholders of a billion rand, which is what they have done since 2020.
Another important measure would be to strengthen capital controls to limit financial outflows. If financial outflows are controlled, it is not so necessary to increase interest rates to attract inflows. This enables greater independence over monetary and fiscal policies. Read five alternative policy proposals to deal with inflation here.
For media comments contact:
Dominic Brown, AIDC Director on 081 309 4973
Dick Forslund, AIDC Senior Economist on 082 895 7947