Impact of interest rate changes on South African GDP and households: a combined macroeconomic and social accounting matrix modelling approach

Abstract

In this article, research findings are provided that estimate the impact of interest rate changes from a macroeconomic perspective on South African households. The study addresses the impact on the economy as a result of a 100 basis point increase in the interest rate, with the focus on households, by combining a macroeconomic model and a social accounting matrix.
The results from the macroeconomic model show a reduction of 0.54% in nominal GDP as a result of a 100 basis point increase in the nominal interest rate, given a three quarter lag. This equates to a decrease of R13 billion in the GDP (in 2009 prices). The real GDP impact is estimated at -0.22%, or a decrease of R5.3 billion. Employment opportunities are estimated to decrease by more than 26 000.
The results from the impact analysis per household and per expenditure decile show that, as expected, the biggest percentage impact as a result of the 100 basis point increase in interest rates is on higher income households. Households in the highest decile have a 0.6% decrease in expenditure compared to a -0.23% impact for the poorest households. This is as a result of households in higher income groups having relatively more access to credit, giving rise to higher average debt to household income ratios. Highly skilled individuals also have the highest percentage drop in employment at 0.28% (compared to -0.22% on average). However, the biggest employment impact (in terms of the number employed) is on the skilled, semi-skilled and unskilled and informal sectors of the economy, where an estimated 21 736 individuals may lose their jobs (using 2009 as the base).
The sectors that show the biggest Rand value and employment impacts, as a result of the 100 basis point increase in interest rates, are the wholesale and retail trade sector. This is to be expected given the size of the retail sector in South Africa. The biggest impact, in percentage terms, is on the beverages and tobacco sector.
Looking at the results from this model, employment accommodative economic policies would encourage lower interest rates (although the impact of lower interest rates on inflation and the impact of inflation on lower income groups should also be considered).

Key words: interest rates impact, macroeconomic modelling, economic impact modelling, South African households, social accounting matrix