Guiding consumers since 2009

What does inflation targeting mean for your money?

By Staff Writer

The Guv, Tito Mboweni, is going to step down. His replacement is Gill Marcus, the new Guv. Mboweni was responsible for the policy of inflation targeting, the main mechanism of which is the heavy hand of interest rates. Marcus starts in November and there are three more meetings of the Monetary Policy Committee before then. Whether Marcus changes anything still remains to be seen. There has been a debate about the efficacy of inflation targeting and its effect on the consumer. So what do interest rates affect?

 

  • Interest on savings acounts drops
  • Credit is harder to come by
  • Inflation is slowing

 

The Reserve Bank sets the Repo rate which is the cost at which the commercial banks can borrow money from the Reserve. This then determines the rate at which they will lend to you. Inflation targeting started off by aggressively hiking the Repo and has slowed down somewhat this year as inflation figures started to fall. As money gets more expensive to borrow it becomes less available. Our economy was overheating and along with the National Credit Act we should probably be thankful that we were not able to get as much credit as we wanted and so did not follow the rest of the world into the mire.

Commercial banks are commercial operations and here to make money, that means as that as the Repo drops, even though money costs less for them to borrow, they will cut the interest they pay you on your savings accounts. However with inflation coming down stuff is getting more expensive less quickly which translates into more Rands in your pockets, even though major sectors, such as food, are out of step with headline inflation and still increasing in price at a faster rate. Inflation targeting via interest rates only is a blunt tool, so lets see what the new Guv will bring to the table.

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