The Real Interest Rate in SA hits the Negative Mark
Image by Andre Taisin- Unsplash
The previous week saw the South African Reserve Bank Monetary Policy Committee (MPC) announce its decision to keep the policy rate unchanged at 3.5%, the lowest it has been for over two decades.
While maintaining a low repo rate plays a crucial role in creating an environment that is conducive for economic recovery by reducing the cost of debt, the decision has unintended negative consequences on macro variables such as savings, purchasing, the power of consumers, and wealth, all else constant. According to the Fischer Effect, the real interest rate equals the nominal interest rate minus one period-ahead inflation expectations,
that is r(t)= i(t) - inflation(t+1)
Given that the MPC has held the repo rate at 3.5% and the Bank’s Quarterly Projection Model predicts the inflation expectations to be stable around 4.5% the real interest rate is thus -1%. This implies that all else constant, in real terms, the interest rate earned on savings is a percentage point lower when calculated using the repo rate. Since savings form part of wealth, the negative real interest rate also has a negative impact on wealth. This is particularly significant given the latest data from the SARB indicates that South Africans have increased their savings significantly between Q1 2021 and Q2 2021. Furthermore, the negative real interest rate reduces the purchasing power of consumers, that is, given the nominal wage consumers will afford to purchase fewer items in their consumption baskets.
The US continues to raise its Debt Ceiling
Image by Adam Nir- Unsplash
This week, the US Senate voted in favour of a temporary increase in the country’s public debt ceiling to avoid what was a looming default. The debt ceiling was established in 1939 to limit the amount of debt the government could accumulate. Since then, the ceiling has been raised more than an alarming hundred times.
The consequences of the default would include a recession and a decline in the country’s credit rating. However, there would also be significant consequences beyond the US. Because the US economy, its currency, and debt instruments are critical vehicles driving the global economy and financial markets, a public debt default in the US economy would send catastrophic ripple effects to the entire global economy. Given the unsustainability of the extensions, policymakers warn that there is a need for a long-term solution.
South Africa Now Off The UK Red List
On Thursday afternoon South Africa, as well as 46 other countries, were removed from the UK travel red list which required people travelling from these countries to spend 11 nights in a quarantined hotel at a cost of £2 285 per traveller. This comes as great news for South Africa as the country is a favourite travel destination for British tourists who contribute significantly to the tourism industry. Per the UK government website, 430 000 British tourists visited South Africa in 2019.
The UK is a strategic trade partner for the country despite the Brexit-related uncertainty which was expected to have a negative effect on trade relations as South Africa had been the EU’s largest trading partner in Africa. The Southern Africa Customs Union countries entered into a SACUM-UK Economic Partnership Agreement (EPA) which was concluded in 2019 thereby curbing any detrimental effects on trade resulting from Brexit as it allows for the full or partial removal of customs duties on exports from South Africa to the UK and includes other terms in the SADC-EU EPA.