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Press Release – 2016/03/18: INTEREST RATE INCREASE IS “A TERRIBLE BLOW TO THE ECONOMY”

By 18th Mar 2016Sep 20th, 2019No Comments

Speaking after Reserve Bank Government Lesetja Kganyago announced that the Monetary Policy Committee (MPC) had decided to increase the repo rate by another 25 basis points, following a similar increase at the MPC’s last meeting, SEIFSA Chief Economist Henk Langenhoven said the reasons for the Bank’s decision were “even worse news”.

Mr Langenhoven said the Bank’s fears of lower economic growth – which it expected to continue for at least two years – were becoming a reality, with low export potential, low consumer spending potential and stagnation in investment spending. He said the Governor’s inflation expectations was also bad news, with inflation expected to remain outside of the target range for longer, mainly driven by food price escalation and oil/fuel price increases.

Mr Langenhoven said that the weak exchange rate was of concern, with its passthrough effect expected to be higher in the coming months. He said that the current under-recovery in the oil slate will most likely lead to a full reversal in April of the recent fuel price decrease, and this was a specific sign of inflationary pressures spreading through the economy.

“From our (SEIFSA’s) own price monitoring, it is evident that the cost increases emanating from more costly imported products are already pushing production costs upwards in the metals and engineering sector.

“Although the rate increase is marginal, and the signal by the Bank of its vigilance regarding inflation is probably necessary, the impact on the survival of companies and growth may be disproportionally more costly than meets the eye. Our impression is that a large proportion of companies are walking a very tight rope between survival and closure, with even a small nudge like this likely to have the potential to push those companies into bankruptcy,” Mr Langenhoven said.

He said the Bank’s announcement was evidence of the lack of policy space by both the monetary and fiscal authorities to effect positive growth adjustments.

“It is as if the economy drifted closer and closer to stagnation accompanied by inflation, which is a lethal combination for declining wellness of individuals and companies. The latter, and the fact that the Bank’s researchers have revealed that the economy officially peaked in November 2013 and started on a downward cycle since, gives a feeling of vulnerability which is very tangibly manifested in means that do not meet ends.

“This is a very worrying situation, indeed, for individuals, companies and the country alike,” Mr Langenhoven concluded.

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