The Monetary Policy Committee of the South African Reserve Bank is meeting until Thursday to discuss and review the country’s current level of interest rates.
Having announced no hike in the interest rate in its previous meeting in January this year after a hike of 25 basis points in November last year, all eyes will be on whether the MPC will raise interest rates again.
The outcome of this announcement will impact all South Africans in one way or another.
Simply put, if interest rates are raised, the cost of debt becomes more expensive and South Africans’ pockets tend to become tighter.
As such, investors tend to become more risk-averse when interest rates rise.
This is because the cost of any repayments on existing debt will increase accordingly, which will typically leave people with less disposable income and decrease average national spending.
Slower national consumer spending is generally viewed as bad for the economy, which usually means lower corporate valuations and, ultimately, poor performance from equities and many other “riskier” investments.
But it’s not all bad
However, a rise in interest rates is not necessarily bad news for everyone.
Higher interest rates are positive for people who have savings or investments that are linked to the repo rate.
This is because their savings will earn interest at a faster rate, which will result in higher returns over time.
Here’s the rub
Regardless of whether interest rates are raised this week, South Africans will have to keep their spending and debt in check over the coming months.
By repaying current debt and future debt South Africans will ensure that they are not negatively impacted an more by any future interest rate hikes that may lie ahead.
• Sanisha Packirisamy is chief economist at Momentum Investments