HOT TOPIC | Why are interest rates increasing although the South-African economy is struggling?

The South African Reserve Bank (SARB) was established in 1921 and is the oldest central bank in Africa. The primary role of the SARB is to protect the value of the South African currency and to maintain price stability in the economy (inflation). The SARB is responsible for formulating and implementing monetary policy, which includes setting interest rates and managing money supply.

So why does the South African Reserve Bank keep on increasing interest rates although the economy is struggling?

One of the primary reasons is to control inflation. When inflation rises, it reduces the purchasing power of the currency, leading to a decline in economic growth. Therefore, the SARB may increase interest rates to reduce spending, slow down the economy, and control inflation.

Let’s take a step back, what is inflation?

Inflation refers to the rate at which the general level of prices for goods and services is increasing over time. In other words, it is the rate at which the purchasing power of a currency is decreasing. Inflation is typically measured using a consumer price index (CPI), which tracks the price changes of a basket of goods and services that the average household purchases.

Therefore, the main reason to increase interest rates is to control inflation, by making it more expensive to borrow money. This makes people spend less money and helps to slow down the economy and control inflation.

Raising interest rates can also help to stabilize the currency. If investors are losing confidence in the country's economy, they might sell off their currency holdings, leading to a drop in the value of the currency. Raising interest rates can help make the currency more attractive to investors, which can help stabilize its value.

Another reason is to attract foreign investment. Higher interest rates attract overseas investors who are looking for higher returns on their investments, so money flows into the country, creating capital inflows that improve the country's economic situation and boost the value of the local currency.

Overall, the decision to increase interest rates in a struggling economy is a balancing act between the need to control inflation, attract foreign investment and stabilize the currency, while also considering the impact on economic growth.