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  • Thando Ngozo

The Impact of the SARB Hiking Cycle on Economic Growth


The South African Reserve Bank (SARB) hiking cycle has been a hot topic of economic debate for years, and its impact on economic growth cannot be overstated. Some argue that it is a necessary step to curb inflation and maintain stability, while others believe that it is a hindrance to growth and development. But what is the real impact of this hiking cycle on the economy?


On the other hand, a hiking cycle can also positively affect the economy. By controlling inflation, the SARB can create an environment of stability and predictability that encourages investment and growth. This can increase confidence in the economy, attracting foreign investment and stimulating domestic production.


So, what is the real impact of the South African Reserve Bank hiking cycle on economic growth in South Africa? The answer is complex. On the one hand, a hiking cycle can slow growth and decrease demand for goods and services. On the other hand, it can create a stable environment that encourages investment and growth.


The impact of the hiking cycle can vary depending on the state of the economy. In times of economic growth, a hiking cycle may be necessary to prevent overheating and inflation. However, in times of economic recession or slow growth, a hiking cycle can be harmful and exacerbate the economic downturn.


The hiking cycle by SARB can significantly impact economic growth. When interest rates increase, borrowing becomes more expensive, decreasing consumption. This can lead to a decline in consumer spending, slowing economic growth. Moreover, Higher interest rates can also increase the cost of borrowing, discouraging businesses from investing in new projects or expanding existing ones. Hiking interest rates can lower inflation by reducing demand and slowing economic growth. An increase in interest rates can make a country's currency more attractive to investors, thus increasing the exchange rate. This can make exports more expensive, translating into decreased export demand and reduced economic growth.


The SARB increased interest rates from 7.0% to 12.0% in response to rising inflation between 2006 and 2008, which led to a decline in consumption and private investment. Private consumption growth slowed from 6.1% in 2006 to 3.7% in 2007 and 1.7% in 2008. Private investment growth declined from 12.2% in 2006 to 8.8% in 2007 and 4.8% in 2008. The exchange rate appreciated by 21.9% during this period, which made exports more expensive. Export growth slowed from 12.8% in 2006 to 8.2% in 2007 and 5.9% in 2008. This significantly impacted the economy, with GDP growth declining from 5.6% in 2006 to 3.1% in 2007 and 3.3% in 2008.


The SARB again reacted to weakening currency and rising inflation and increased interest rates from 5.5% to 7.0% between 2014 to 2016. This subsequently translated into a decline in consumption and private investment. Private consumption growth slowed from 2.8% in 2013 to 1.5% in 2015 and 0.7% in 2016. Private investment growth declined from 5.5% in 2013 to 2.0% in 2015 and -2.1% in 2016. The exchange rate depreciated during this period, which made exports more competitive. However, export growth slowed from 4.7% in 2013 to 2.1% in 2015 and -0.8% in 2016. This hurt the economy, with GDP growth declining from 2.2% in 2013 to 1.3% in 2015 and 0.6% in 2016.


In November 2018, the SARB increased interest rates by 25 basis points from 6.5% to 6.75% per year, which had a limited impact on consumption and private investment. Private consumption grew from 1.5% in 2017 to 1.9% in 2018. Private investment growth improved from -0.8% in 2017 to 0.7% in 2018. The exchange rate depreciated during this period, which made exports more competitive. Export growth improved from 2.8% in 2017 to 4.2% in 2018. This had a limited economic impact, with GDP growth remaining at 0.8% in 2018 and 0.2% in 2019.


In March 2020, the SARB decreased interest rates, positively impacting consumption and private investment. Private consumption grew from 1.9% in 2019 to 3.4% in 2020. Private investment growth improved from -2.8% in 2019 to 4.0% in 2020. The exchange rate depreciated during this period, which made exports more competitive. Export growth improved from -13.2% in Q2 2020 to 1.8% in Q4 2020. This positively impacted the economy, with GDP growth improving from -7.0% in Q2 2020 to 1.1% in Q4 2020.


In March 2023, The SARB increased interest rates for the 9th consecutive time since policy normalization started in November 2021, bringing borrowing costs to the highest since May 2009. Annual growth in real GDP slowed from 4.9% in 2021 to 2.0% in 2022.


Higher interest rates can also increase the cost of servicing government debt. This can put pressure on government finances and lead to a decrease in public spending, which can slow down economic growth. In 2014, SARB raised interest rates in response to inflationary pressures, which increased the cost of servicing government debt. Government's debt service costs as a percentage of revenue increased from around 8% in 2012 to around 12% in 2015 following the interest rate hike. During this period, government spending on education, health, and social protection also decreased, which hurt social welfare and economic growth.


Ultimately, the impact of the SARB hiking cycle on economic growth is a complex issue that requires careful consideration and analysis. While a hiking cycle can positively and negatively affect the economy, finding the right balance between maintaining stability and promoting growth is essential. This requires a nuanced approach that considers the unique characteristics of the South African economy and its challenges. The Reserve Bank must carefully consider the impact of its policies on various sectors of the economy and work to ensure that its actions support the long-term growth and development of the country.

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