Last week Bheki Mahlobo forecast that the United States (US) Federal Reserve and the Bank of Japan would hike interest rates while the Bank of England would make no change. He also forecast that South Africa’s central bank would hike rates this coming Wednesday to defend the rand against a narrowing interest rate differential.

Mahlobo forecast that strong employment numbers and inflation well above the target rate would see the US Federal Reserve raise rates by 25 basis points, taking its target range to 3.75% to 4.00%. It did exactly that last Wednesday, citing the labour market and inflation as the two core drivers.

Mahlobo also forecast that the Bank of Japan would follow suit and raise rates by 25 basis points to 1.25%. The bank announced that decision last Friday.

He further forecast that the Bank of England would leave its policy rate unchanged at 3.75%. It did that with a six-to-three split decision, with three policymakers voting for a 25-basis point increase.

Mahlobo’s fourth forecast is that the South African Reserve Bank will follow the Fed’s and Japanese examples and raise its policy rate by 25 basis points from 7.00% to 7.25% when its Monetary Policy Committee meets this coming Wednesday.

According to Mahlobo, the central bank has little choice in the matter if it wants to defend the rand from a narrowing interest rate differential with the US.

Before the Fed hike, the midpoint of the US policy range was 3.625%, leaving a 3.375-percentage-point gap with South Africa’s 7.00% rate. The Fed increase narrowed that gap to 3.125 percentage points.

A South African increase to 7.25% would restore the previous differential.

Largely because of the government’s black economic empowerment and expropriation policies, and South Africa’s ensuing low investment and growth rates and associated political risk, South Africa must offer investors sufficient compensation for holding rand-denominated assets rather than US assets. A narrower interest rate differential reduces that compensation, and as demand for rand-denominated assets falls, so does the value of the rand.

A weaker rand, in turn, feeds into higher imported goods prices, especially petrol and diesel prices, which, in turn, feed into broadly higher prices across the economy. To curb the extent of this, South Africa’s central bank has to raise interest rates. That in turn places further pressure on consumers and stunts the growth prospects of the local economy, but given the risks of a weakening rand, this cannot be helped. This broadly negative chain of events is a good but seldom articulated case study of the price ordinary South Africans have to pay for the populist and counterproductive policies of the government.