PwC presents arguments for and against a hike in interest rates
As the senior officials in South Africa debate whether to increase interest rates to match inflation rates, global professional services firm PwC identifies a number of factors that tilt the outcome in either direction, including the consideration that rising interest rates might discourage foreign investment.
The decision will expectedly be reached by Thursday following the conclusion of 2018’s last Monetary Policy Committee meeting of the South African Reserve Bank (SARB). Deliberations are currently underway, and the primary argument for a hike in the interest rates is an anticipated increase in inflation levels across the country.
Deliberations are taking place within the context of a drop in interest rates shortly after tax hikes were announced in March this year, both in the repo rates – which dropped to 6.5% – and in the prime lending rates that fell to 10%. While some members of the panel hope to maintain this stability, others wish to reduce the strain on the public coffers.
According to PwC, factors exist to support both sides of the argument, which makes a unanimous decision an unlikely outcome. A member of the committee retired earlier this year, which leaves six members on the panel. PwC anticipates that an even split of three and three can be expected.
One of the biggest considerations for the committee is the impact that either outcome might have on South Africa’s attractiveness to foreign investment, something that is high on the agenda for the current Prime Minister Cyril Ramaphosa, and is perceived by many as crucial to South Africa’s development in the near future.
The Prime Minister’s objective is to attract investments to the tune of $100 billion to South Africa over the next five years. According to PwC, such investment levels could add as much as R338 billion to the South African economy, in addition to 165,000 jobs, provided that no additional barriers emerge to foreign investment.
A hike in interest rates could act as such a barrier, given that a larger difference in interest rates between South Africa and more developed markets is essential to keep the Rand exchange rate at a higher value and consequently attract foreign investment.
On the other hand, the state of the South African economy calls desperately for a hike in interest rates, no matter how small. According to PwC, the country has found itself in a “technical recession” for most of this year, further compounded by high levels of unemployment, high fuel rates and consequently low purchasing power.
