I’m sure many South Africans are very happy that the reserve bank cut interest rates earlier this week by a 100 basis points.

Perhaps the MPC could have been a bit more conservative, by lowering the repo rate by only 50 basis points, but overall I think it was a good decision. The right thing at the right time.

Here is some more good news (if you are South African): South Africa is quite well positioned to ride out (and even flourish in the midst of) the world-wide economic crisis.

Unfortunately, the same cannot be said for many of our first-world friends.

Give the junkie another hit

So we have sub-prime crisis.

The crisis was basically created when too much credit was granted to people. A lot of these people became over-indebted and couldn’t make their payments anymore. The market was flooded by repossessed properties, supply outweighed demand, and finally the property values – the backbone that secured and supported the debt funding the American dream – collapsed.

Value disappeared, security vanished into thin air, bad debts soared, banks went under.

So much for the American dream.

But what surprised me most was not the mistakes that were made. It is the way the world’s biggest nation chose to respond to the problem:

• It lowered interest rates further, in an effort to stimulate the economy (i.e. get people to make more even more debt)
• It comes up with a bailout plan – for the guys who made the mess in first place

Give the addict another hit. Hell of a solution.

South African reserve bank – a job well done

One person we have to thank for the good position the South African economy is in, is Mr. Tito Mboweni. Despite a lot of criticism, comparisons to the actions of the developed world and many people in South Africa suffering because they over-extended themselves with debt, he stuck to his guns and kept raising the repo rate during 2007 and 2008.

Sidenote (in case you’re wondering): The repo rate is the rate at which the reserve bank lends money to commercial banks. When the repo rate goes up, the banks also raise their lending rates. I.e., if you have debt and the repo rate goes up, you pay more interest.

Mr. Mboweni probably didn’t know that there was a economic crisis coming. He was merely trying to counter inflation by hiking interest rates, and thereby discouraging people to make more debt (and thus spend less).

Whatever his reasons were, the fact remains: at the moment we have a relatively high repo rate in South Africa, while inflationary pressures are fading.

This leaves quite a lot of room for the reserve bank to maneuver and stimulate growth in the economy. Our interest rates are a lot higher than inflation, leaving us with a large buffer to play with. Unfortunately the same cannot be said for most of the developed countries in America and Europe.

I am taking my hat off to Tito Mboweni and the MPC. Their actions may very well be the saving grace for South Africa, while most of the developed world is entering a long and uncertain period of recession. Well done Tito!

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