We could be in for a shock come 12 June when the Monetary Policy Committee (MPC) meet to make a decision on interest rates. Reserve Bank governor, Tito Mboweni, has hinted that they may decide to increase interest rates by 200 basis points in June. This would mean that the prime lending rate from banks would be 17%. With the ever rising inflation in South Africa, the central bank has a mandate to get inflation to be between 3 – 6% and its seems that they are failing in their quest as inflation is now standing at 10.4%. Is increasing the interest rates the only solution to stopping this runaway inflation?

Many analysts predict a 100 basis point hike in June which would mean prime lending rate is 16%. But the Reserve Bank governor has warned us that we should expect tougher times and that things will get worse first and we will go through a lot of pain before things get better. Hiking the rates by 200 basis points would really hurt. That increase of interest rates by 2% would hit some people really hardly, especially the majority of South Africans who are heavily in debt.

One can not afford to buy a house cash and thus they take out a mortgage. With a 2% hike, the cost of the mortgage would inturn go up and may become unaffordable for many. One gentleman I spoke to last night was really up in arms about the possibility of an interest rate hike and he suggested that the central bank separate interest rates on housing from the rest. His reasoning was that; purchasing assets such as houses is the only ‘savings’ most people have and if you take away that opportunity from people they will not have any assets to their name. In increasing interest rates, you are denying people the opportunity to purchase houses. It is a valid point but realistically, one can not see the central bank doing such.

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