The Impact of Interest Rate Hikes on Unemployment: Dissecting SARB Governor Lesego Kganyago’s Statement

Since November 2021, the SARB has executed 10 consecutive interest rate hikes, totalling 475 basis points, as a response to the elevated inflation resulting from the COVID-19 pandemic. These interest rate increases were enacted to align with the central bank’s inflation-targeting framework. In this framework, the SARB employs monetary policy tools, particularly the adjustment of short-term interest rates, to maintain inflation within a specified target range of 3% to 6% per annum. This act by the central bank was criticized by many economists and others alike.

During the PSG Think Big webinar on the 5th of October 2023, Lesego Kganyago, the Governor of the South African Reserve Bank (SARB), responded to a member of the audience who questioned the SARB’s consistent approach to monetary tightening. The audience member contended that the recent interest rate hikes by the central bank seemed to be influenced by developed countries’ Economic thinking and did not take into account South Africa’s prevailing economic circumstances, particularly the ongoing issue of persistent unemployment. 

In response, the SARB governor tried to protect their monetary policy stance by arguing that the unemployed are not impacted by high-interest rates as they typically do not qualify to raise debt. Instead, he emphasized that inflation is the primary variable affecting them. This response garnered significant attention and has left public opinion divided, with some individuals even suggesting that the governor’s statement was incorrect. In this article, we will provide our perspective on the statement made by the governor.

Relationship Between Interest Rates and Inflation

Before we dive into the nitty gritty of whether the governor’s statement was accurate or not, it is important to grasp the relationship between interest rates and inflation. To better grasp the nexus between these two concepts, let’s revisit our Economics 101 class. The important theory to this argument is Irving Fisher’s renowned theory known as the “Fisher Effect.” This theory posits that the real interest rate is equal to the nominal interest rate minus the anticipated inflation rate (r=ἱ-).

For instance, when the South African central bank enacts a hawkish monetary policy, such as increasing interest rates, it has the potential to mitigate expectations of inflation. If the Fisher Effect holds, this reduction in anticipated inflation could result in a lowering of nominal interest rates in order to maintain a constant real interest rate. In general, there is a positive correlation between interest rates and inflation. When inflation rises, central banks may respond by increasing interest rates to control inflation. This is because higher interest rates can reduce spending and borrowing, which, in turn, can help slow down economic activity and inflation. Figure 1 below shows the relationship between South African inflation and the SARB interest rate hikes from 2002. 

Figure 1:Relationship between South African inflation (CPI) and the SARB interest rate hikes.

The positive correlation between the two variables is depicted in Figure 1 above. To illustrate, as the inflation rate rises, the SARB responds by raising interest rates, thereby elevating borrowing costs. This, in turn, influences consumer spending and overall demand, leading to a subsequent reduction in inflation.

How High-Interest Rates Affect Individuals

Persistent high interest rates have two distinct effects. It depends on which side of the coin you are on. If you are a borrower interest rate hikes make borrowing more expensive, and if you are a saver, it makes saving lucrative.  Individuals who have variable-rate loans, such as interest rate linked mortgages or credit card balances, will see their monthly payments rise. This can strain household budgets and make it more challenging to take on new debt or manage existing debt.

“Interest rates mainly tell us what the cost of borrowing is”. The key term in this statement is “borrowing.” On the positive side of the coin, high interest rates can benefit individuals who have savings accounts, certificates of deposit (CDs), or other interest-bearing investments. They earn more on their savings because financial institutions typically offer higher interest rates to attract deposits when overall rates are high.

Hence, the governor was accurate in asserting that high interest rates do not have a direct impact on the unemployed, as one must be employed to access borrowed funds. In general, raising interest rates can make borrowing more expensive and saving more attractive, which might not directly affect those without employment.

How Sustained High Inflation Affects Individuals

On the other hand, a general increase in the price level of goods and services affects everyone, regardless of their employment status. According to Redge Nkosi an economist at First Source Money stated that only the dead are not affected by inflation. The unemployed are not dead people who do not get affected by the increase in the administered prices.

High inflation erodes the purchasing power of money, meaning that the same amount of money can purchase fewer goods and services. This can result in a decline in the standard of living, making it progressively challenging for individuals to meet their everyday expenses, such as groceries, fuel, and housing. Furthermore, high inflation influences consumer behavior. People might choose to spend money more quickly, anticipating that prices will rise in the future. This, for instance, can lead to increased demand in the short term, contributing to higher prices and a potential inflation spiral.


In conclusion, the governor’s remarks were accurate, though the wording could have been improved. The more precise response would be that interest rates do not have a direct impact on the unemployed. However, they can indirectly affect the unemployed by potentially impeding economic activity and job creation, thereby making it more difficult for them to secure employment.

This indirect effect is particularly significant when interest rates are high. It is important to note that; the interest rate is an administered price, meaning a price that is controlled by the central bank. Interest rates affect borrowers (Directly) and non-borrowers (Indirectly) alike, and inflation itself is included in the price of rates (as mentioned above), as that price was factored into other prices in the economy. A rate hike, like most other administered prices, filters down to everyone.


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