OK, Tell Me More?
The recent major depreciation of the Rand to the USD, spurred by contagion from the fallout of the Turkish lira, has led consumers wondering what this means for their wallets.
The South African Reserve Bank’s (SARB) monetary policy* (think objective) is to keep inflation, or the rate at which the general price of goods/services is rising, between 3% to 6%. During their meeting last month, they cited the exchange rate as a key risk to inflation.
SARB leadership has indicated that they will not be intervening (think changing interest rates) to try and influence the exchange rates unless it feeds through to the wider economy. That means we may see an uptick in inflation on the back of a weakening Rand.
What Difference Do Interest Rates Make?
Interest rates (think the rate at which debt grows) are used to change the supply of money in the economy and to indirectly affect demand, which then affects inflation. As an example, let’s pretend all consumers received large wage increases at the same time. Following such an event, there’d be a huge increase in the demand for goods due to that increase in disposable income.
An increase in demand would drive the price of the goods up. To lower the inflation rate, the SARB would need to increase interest rates. Increasing interest rates practically means taking money out of the economy and raising the cost of credit/debt. So at the end of the day, higher interest rates mean consumers end up with more debt and less disposable income. This could be why the SARB would rather have consumers feel inflation than by hiking interest rates, ultimately worsening the state of debt in SA.