Interest rate drop will be just reward

The news that the country’s inflation rate has fallen to its lowest level since Covid is reason for cautious celebration – or is it?

Inflation’s taming is due to a number of factors – but an important one is the monetary policy applied by the SA Reserve Bank (Sarb).

This operates on the principle that inflation is caused by increased demand.

And when an economy overheats because of this demand, then the medicine normally applied is to raise interest rates.

High interest rates will, naturally, discourage the growth of credit, which is what drives demand.

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But that leaves us with a Catch-22 situation: higher interest rates help to bring down inflation but lowering them to stimulate growth will see prices rise.

Economists are telling us there is no good inflationary reason that the Sarb should not substantially lower the base lending rate by at least one percentage point after today’s meeting of the monetary policy committee.

Lowering the cost of borrowing will help many who are drowning in debt.

Yet again, though – another Catch-22 – lowering the interest rates affects pensioners and discourages savings.

We can’t help but feel, though, that the country deserves a little reward for all it has been through in the last few years.

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