Repo Rate Increase

. July 22, 2014

by Akhona Dafeti

 

After the MPC (Monetary Policy Committee) sat for 3 days last week the Reserve Bank announced on Thursday a 0.25% repo rate increase. Let’s start by first defining what the MPC and repo rate is. In monetary policy decision-making processes, committees are preferred above individuals. Not one central bank has replaced a committee with a single decision-maker, a fact that has both theoretical and empirical support. The ability to draw diverse viewpoints from constituent members in committees ensures that there is likely to be some moderation of extreme positions and policies and more so policymaking.
South Africa is part of this trend and the decision on the appropriate monetary policy stance is taken by the Monetary Policy Committee (MPC). This committee was established shortly before South Africa adopted the inflation-targeting framework. The MPC consists of eight members of the Bank: the Governor who chairs the MPC; three deputy governors and four senior officials of the Bank.
Repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. The Repo rate is used by monetary authorities to control inflation. In the event of inflation rising above the target range, the central bank will raise the repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation (read more here). After the MPC sat, the decision was taken to increase repo rate 25 basis points (quarter of a percentage) from 5.5% to 5.75%. This will result in an increase in prime interest rate (interest rate on short term loans that banks charge their commercial customers with high credit ratings) from 9% to 9.25 %.

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What are the impacts of this this increase to the public and economy?
This increase will affect those South African citizens most with huge debts as the interest on these debts will increase putting more pressure on salaries. Home loans, car finance loans, personal loans and other interest bearing debts will increase as the prime rate increased to 9.25%.On the positive side the increase will prevent the public from getting themselves further into debt as consumer debt in South Africa is already sitting R1.47 trillion. From the economic point of view, I hope this will also strengthen our weak Rand as is it was one the factors that drove the increase in the inflation rate (Consumer Price Index) from 6.1% in April to the current 6.6%. I also hope the current strike reaches an end sooner rather than later as we know that the platinum strike had its fair share of damage to the economy. One of the results is the possible is a fuel hike towards the end of January.
In conclusion, the repo rate hike might be exactly what our country needs at this moment even though it will affect consumers negatively. This is essential in order to contain inflation within the target range of 3% – 6%.

 

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Category: Archived ECHO 1, Uncategorized

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