The rand’s behaviour is the main determinant of our inflation rate — but the Reserve Bank is fooling itself if it thinks it can have a positive impact on the currency in any easily predictable way.
main determinant of our inflation rate — but the Reserve Bank is fooling itself if it thinks it can have a positive impact on the currency in any easily predictable wayReserve Bank governor Lesetja Kganyago accepts that the economy is in dire straits. However, in seeming disregard for the severity of the problem, the monetary policy committee on May 25 unanimously ordered a further 50 basis point increase in short-term borrowing costs for mortgages and overdrafts.
The governor justifies raising interest rates in a distressed economy as part of a “no pain, no gain” regimen. He argues that though increasing interest rates may have a negative impact on the growth rate of the economy in the short term, in the longer term his actions will lead to low and stable inflation rates; these will, in turn, embed expectations of continuing low and stable inflation rates into the future. His implicit assumption is clearly that the latter will outweigh the former. ..
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