Capitec CEO urges policymakers to rather focus on REAL interest rate, as SARB moves closer to lower inflation target
SA Reserve Bank Governor Lesetja Kganyago has now said that a new, lower inflation target band should be finalised 'very soon'.
FILE: South African Reserve Bank (SARB) Governor Lesetja Kganyago. Picture: Karabo Tebele/702
The Money Show's Stephen Grootes talks to the chief economist at Rand Merchant Bank, Isaah Mhlanga.
The South African Reserve Bank (SARB) has made it clear that it's intent on lowering our inflation target, as inflation softens.
The unrevised target band sits at at 3-6%.
And Governor Lesetja Kganyago has now told Bloomberg News that this should be finalised 'very soon'.
At the same time, Capitec CEO Gerrie Fourie has urged policymakers to focus on the real interest rate, rather than the inflation target band.
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Addressing a webinar, Fourie said the real rate - which he described as the gap between inflation and the repo rate, is more important, News24 reports.
Stephen Grootes asks RMB chief economist Isaah Mhlanga to give a simple explanation of the difference between the interest rate consumers pay, and the real rate.
"The rate we pay for our normal mortgages or car repayments or on our credit cards - that is the NOMINAL interest rate, which means it's not adjusted for inflation. What investors will have to look at is the REAL one, which means you adjust for inflation."
Isaah Mhlanga, Chief Economist - Rand Merchant Bank
Mhlanga says the Reserve Bank does take this real rate into account when forecasting growth; it's just that the way it talks about the interest rate depends on the audience it's communicating with.
As such, the issue is 'neither here nor there', in Mhlanga's view.
"When policymakers communicate to the general public, to labour that needs to agree to wage settlements... they will talk about the nominal interest because it will be more easily understood."
Isaah Mhlanga, Chief Economist - Rand Merchant Bank
"When communicating to investors... for instance, asset managers onshore or offshore, they will talk about the real interest rate because that's what matters to, say bond markets."
Isaah Mhlanga, Chief Economist - Rand Merchant Bank
Scroll up to the audio player to hear more from Mhlanga