Have you ever wondered how inflation and interest rates affect each other?
Inflation and interest rates are closely tied. This is because interest rates are the key tool used by countries’ central banks to control inflation.
Most central banks across the world try to keep inflation rates below an agreed level. Here in South Africa, we have the SARB (South African Reserve Bank) which has a mandate to keep inflation between 3% and 6%. As previously mentioned, banks will raise interest rates when inflation increases to try to control it.
This means that higher interest rates will lead to higher borrowing costs and cause consumers to spend less. This effect should ultimately dampen inflation.
The same could be said for the opposite: If inflation is low and an economy is growing too slowly, central banks might decrease interest rates to cause more borrowing and more spending.
The following graph shows how South Africa’s inflation rate has been on the rise from early 2021 till this current date.
In some cases, inflation can be a good thing for the economy and businesses. For instance, “mild” inflation has a healthy side effect. Once people start to expect inflation, they tend to spend now rather than later because they know prices will be higher in the future. And consumer spending drives economic growth.
With increasing interest rates comes the problem that there are a lot of companies that can’t afford these loans anymore, causing them to miss out on high-yielding opportunities that could have been made possible if they had the right funds for it.
This is where alternative financiers come into play. Alternative financiers, such as CorpFin offer short-term loans at fixed interest rates. This means that the interest rates will stay the same even if inflation rises throughout the country. CorpFin realizes financial opportunities during these rough times and would love to help your business reach new heights by providing you with a short-term loan to fund your business in time.
Before applying feel free to contact us to fully understand how we work or browse through our website for more information.