THE IMPACT OF INTEREST RATES ON THE SOUTH AFRICAN EQUITY MARKET

Abstract

This paper investigates the effects of interest rate fluctuations on the South Africa's equity market. The Johannesburg Stock Exchange (JSE) - All Share Index (ALSI) was used as a proxy for the equity market, whilst treasury bill rates were used to represent interest rates. The Vector Auto Regression (VAR) model was applied to analyze the relationship between interest rates and the equity market. The Vector Error Correction Model (VECM) augmented the analysis by assessing the short and long-run dynamic relationship between the two variables. Monthly data was collected from Thomson Reuters and the South African Reserve Bank from 2002 to 2020. The results indicate that the relationship between interest rates and the equity market was significant but negative; that is, equity or share prices fall when the interest rates rise. A fall in share prices resembles poor or negative performance of the equity market; therefore, the market capitalization and share face value of listed companies is negatively affected. The outcomes of this study may assist the central bank in understanding the relationship between interest rates and equity prices, which can assist in the implementation of monetary policy tools that control interest rates volatility and reduce negative impact on the equity market. Policymakers and authorities could use the knowledge attained from this study to understand the relationship between interest rates and the equity market because an unnecessary increase in interest rates may negatively affect the equity market, leading to slow economic growth.