COLUMN - This week the South African Reserve Bank raised the repo rate by 25 basis points to 7.25%, which takes prime to 10.75%. The reason is inflation. 

The Reserve Bank now targets 3%, and the latest reading came in at 4.4% for August, up from 4.3% in July.

What's interesting is that these rate cycles tend to be global. When we get inflation, the rest of the world usually gets it too. 

Right now everyone is worried about the same thing: rising oil prices and how they feed through into the cost of goods and services.

Last week I wrote about the US Federal Reserve raising rates. The European Central Bank did the same earlier this month, also by 25 basis points. So this isn't a South African problem. It's a global one.

So what happens next?

The textbook answer is that rate hikes slow the economy, and with it the market. Borrowing gets more expensive. It costs more to service existing debt, and it's harder to justify taking risk on new ventures that need funding.

That sounds about right. But the data says otherwise.  

The chart below shows how the S&P 500 performed after rate hikes compared with rate cuts. Since 1982, shares have actually done better after hikes than after cuts.

Matthew Matthee has a wealth management business that specialises in retirement planning and investments. He writes about financial markets, investments, and investor psychology. He holds a Masters Degree in Economics from Stellenbosch University and a Post Graduate Diploma in Financial Planning from UFS. He is a partner at PSG Wealth. [email protected]  

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