If the inflation is so high is South Africa that we are given ridiculous interest figures at banks and on retail bonds, is it helping or not?
The idea behind high interest rates at banks is to curb inflation, but it just compensates for it and drives it further and further.
For example. Bob may put R10000 in the bank and in 10 years that will grow to R17000, in theory. Now, inflation, set at around 6% or so, is compensated for by this. But now Bob has more money to spend, but the same buying power as he did 10 years before. See my point?
Let me know what you think.
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Ah, but you see by giving Bob high interest rates, it encourages him to save his money, right? This is instead of him spending it. Inflation is mostly driven by, among other things, the country's aggregate demand for goods and services. So Bob saving his money and putting it in the bank actually lowers inflation. Another way to look at it, is that higher interest rates increase the price of money. Therefore people spend less, and inflation is reduced. Keep in mind that interest rate increases don't only mean that your money grows quicker in banks - it also means that it becomes much more expensive to borrow money to, for example, buy a house. That's obviously a small part of SA expenditure, but by the same effect it makes the hiring and use of capital much more expensive - which is obviously a very large part.
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