Interest rates are constantly in the news but you may be wondering just what it means for you. We’re going to break down how interest rate changes in the US can have an impact on you here in South Africa.
Let’s set the scene
Recently, the United States Federal Reserve (Fed) made headlines with its decision to hike interest rates, sending ripples across the international financial community. As South Africa is intricately connected to the global economic ecosystem, these rate hikes have sparked curiosity and concern regarding their potential impact on our interest rates.
Who?
The Federal Reserve, often referred to as the central bank of the United States, has the dual mandate of maintaining price stability and promoting maximum employment. One of the key tools at its disposal is adjusting the federal funds rate, which influences borrowing costs for banks, businesses, and consumers. In South Africa, we have the Reserve Bank which has a similar mandate in that they are responsible for protecting price stability and protecting the value of the currency with the ultimate goal of sustained economic growth.
What has been happening?
The Fed has increased interest rates for two key reasons in the last few months:
- Inflationary Pressures: The prices of goods and services increasing too quickly are dangerous. So to prevent runaway inflation, the Fed raised interest rates. By doing so, they are hoping to reduce excessive borrowing and spending, which can contribute to higher prices.
- Economic Pressures: When the economy expands rapidly, there is a risk of overheating. By raising interest rates, the Fed aims to cool down the economy, prevent excessive risk-taking, and maintain sustainable growth rates.
What does this mean for South Africa?
The recent interest rate hikes by the Fed were driven by concerns about inflation and the need to maintain sustainable economic growth. Even though our interest rates are determined by the Reserve Bank, the Fed’s actions can indirectly impact our country. Capital flows (how much money comes into our country through investment), currency exchange rates, borrowing costs, and investor sentiment are some of the ways in which we feel the ripple effects of the Fed’s rate hikes. That said the geopolitical landscape also plays a big role.
What’s next?
The reserve bank aims to keep interest rates within a certain band but if there is persistent economic pressures they may have to action another increase in interest rates.
