Maybe they'll take into consideration the value of the Rand and the effect that has on the price of imports. Nah who am I kidding. It seems that all countries on earth seem to be trying to push and then keep as much money in the economy as possible though quantitative easing, increasing the money supply and interest rates at historic lows. SA, US, UK, EU, Japan, NZ, Aus are all in the same boat. I've not checked any other countries but I wouldn't be surprised if they're doing the same. Of course the debt pile and various asset bubbles are truly staggering so raising the interest rate is going to be a challenge when that finally needs to happen.
Note if it were me making the decision I'd hike. Need to keep inflation in check both internally (CPI, food prices) and externally (ZAR exchange rate). I'd also like to get ahead of the eventual worldwide interest rate hikes. The frequency of meetings needs to be at least monthly. We're living in very interesting times. I'd be inclined to meet monthly and go 25 basis points now and 25 basis points the month after. Otherwise 50 basis points now and see what happens over the next two months. A lot of what will (need to) happen depends on what the US Federal Reserve decides to do as well as the Bank of England. Either way I see a minor interest rate hike doing more good than harm.
I'm familiar with needing multiple instruments to hit multiple targets. Out of interest sakes in your opinion: Which instrument should be used for reigning in inflation? What should the interest rate be used for? Don't forget to include why.
In a stagflation environment the SARB should use the cash reserve ratio and not interest rates. Hiking interest rates further dampens economic growth. Hiking the reserving ratio from 5% to say 10% reduces the money supply but does not add to the cost to capital, it just ensure capital is allocated better. i.e. M3 is reduced and therefore less demand.
Nice reply. However I would consider the following, if the reserve ratio for lenders is increased then: Lenders either need to raise more capital (putting upward pressure on interest rates they pay to investors and thus increasing the rate at which they can lend to borrowers); Or lenders become more selective about who they lend to. In the face of reduced supply and steady demand then lenders can choose safety (quality, risk) or return. If they chose to maximise return then they're going to increase their lending rate. Basically while I understand what you're saying I suspect that the interest rates for the borrowers would increase if lenders have to hold more capital in reserve. I.e. scarcity of capital available to lend drives up its price even if it is a more indirect mechanism.