The impact of interest rates on gross fixed capital formation: The effects of the COVID-19 pandemic and regulatory responses

The South African economy has faced significant challenges in gross fixed capital formation due to the 2008–2009 global financial crisis, the pre-COVID-19 technical recession, and the COVID-19 pandemic. Despite the South African Reserve Bank’s (SARB) efforts to reduce the repo rate to 3.5 percent between 2020 and 2021, the economy continues to face significant challenges (Statistics South Africa [StatsSA], 2021). Therefore, the purpose of this study is to investigate the impact of interest rates on gross fixed capital formation in South Africa. This study uses the autoregressive distributed lag (ARDL) method to investigate the impact of interest rates on gross fixed capital formation. The main findings of the study reveal a negative relationship between real interest rate and gross fixed capital formation in South Africa. Furthermore, savings reveal a positive relationship with gross capital formation. In conclusion, real interest rates affect changes in gross fixed capital creation, with higher interest rates causing decreased investment activity. This study recommends to policymakers that the SARB must lower interest rates to improve investment activity.