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SARB - The big conundrum

South Africa’s monetary policy is facing a conundrum having to deal with a technical recession and ratings downgrades, writes Tshwane City Councillor Jordan Griffiths.

WITH the announcement that South Africa is in a technical recession, there is an urgent need for the South African Reserve Bank (SARB) to assess what tools are available to stabilise the economy.

Economic theory teaches us that during a recession there is a general trend towards decreasing interest rates. The reasoning is that this can assist in stimulating economic activity.

During a recession, people are also less likely to take on debt, thus with a decreased demand for loans this can also contribute to lower interest rates.

In practical terms, if you have a loan or debt and interest rates decrease, you will end up with more money at the end of the month. The real question is what you then do with this money. Some people may opt to save this extra surplus, while others may choose to direct it back into purchases in the economy.

Gross Domestic Product (GDP) represents all the goods and services produced within a country, thus if people start spending more, this increases the demand for goods and boosts GDP, which pulls you out of a recession.

However, the country is also facing another challenge - it has faced consistent downgrades from the major credit ratings agencies. These agencies have downgraded aspects of South Africa’s public debt, which means they are expressing increasing scepticism in the country’s ability to pay back its loans.

If you are an investor this would make you skittish, you aren’t going to sell a bond to a country which may not pay you back.

When faced with downgrades from credit ratings agencies the recommended monetary policy approach is to increase interest rates. In this sense the country keeps investors interested by enticing them with higher returns and offsetting the risk identified by the ratings agencies.

This is the conundrum: Recessions teach us that we should decrease interest rates to stimulate economic activity, while credit downgrades imply that we need to try and ensure we retain investment and this is done through increased interest rates.

With the current levels of unemployment in the country and the effects of the recession, it might be wise for the SARB to either keep the interest rate constant or consider a possible decrease in order to stimulate economic activity.

South Africans would definitely benefit from the extra cash at the end of the month and they could use it to kickstart the economy once more.

*Jordan Griffiths is a City Councillor in Tshwane and member of the Economic Development Committee. He is also the head strategist at Basemedia.

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