Debt-laden consumers in South Africa will be facing yet more hardship as the cost of borrowing looks likely to increase later this month and remain elevated for at least another two months on the back of stubborn consumer inflation.
DEBT-laden consumers in South Africa will be facing yet more hardship as the cost of borrowing looks likely to increase later this month and remain elevated for at least another two months on the back of stubborn consumer inflation.
This comes as the US Federal Reserve signalled its intention to resume interest rate increases amid a growing consensus that more tightening was needed to stamp out high inflation in the world’s largest economy, in spite of leaving rates unchanged for now, at 5 to 5.25 percent.
The South African Reserve Bank (SARB) has given the strongest indication yet that it would probably tighten its monetary policy further and implement another rate hike, though most experts predict a small increase of 25 basis points.
The SARB has implemented a series of 75 basis point hikes over the past year – faster than in prior tightening cycles – in a bid to tame high inflation which slowed to 6.3 percent in May, above the upper limit of the bank’s target range of 3 to 6%.
The bank has raised the repo rate by a cumulative 425 basis points to its highest in 14 years, at a “restrictive” 8.25% per annum since it started tightening in November 2021 to combat surging prices.
Governor Lesetja Kganyago said the SARB expected inflation to continue tapering down and decline within the target range in the latter part of the second half of this year.
Kyangago said the SARB understood that high interest rates came with pain for consumers, but monetary policy was the only effective tool in the shed to deal with rising prices.
“This will come to an end at some point. What will that point be? It would be the point where we see that inflation is converging towards what we consider to be a level that is consistent with price stability, which for us is 4.5%,” Kganyago said.
“We do not take pleasure in South Africans losing houses or losing cars because interest rates have gone up. Interest rates are just a medicine we administer to deal with the disease of inflation.”
Kganyago and the deputy governors held the July 2023 “Soweto Talk to the SARB Forum”, the first physical meeting since the onset of the Covid-19 pandemic.
This is a platform where all five members of the Monetary Policy Committee (MPC) explain monetary policy, discuss factors that have impacted the inflation and the rationale behind the bank’s monetary policy stance.
South Africa’s tight monetary policy has seen the prime interest rate also rising to its highest since the 2008 global financial crisis at 11.75% per annum, resulting in difficulty to meet home loans and vehicle finance debt repayments.
RE/Max Southern Africa CEO Adrian Goslett tried to calm fears in the property sector, saying that the end of interest rate hikes was most probably in sight, and that much like the economy, the property market worked in cycles.
“Until interest rates begin to stabilise and hopefully decrease over time, homeowners will need to work carefully with their budgets to ensure that there are no late or missed payments,” Goslett said.
“For every high – much like we experienced post-Covid – there is a low to follow, as we’ve been experiencing over the last few months. This ebb and flow is completely natural and should not be cause for concern for homeowners and investors.”
SARB Deputy Governor Kuben Naidoo also acknowledged that high interest rates caused hardship for consumers, but said the hardship was less than the hardship caused if the value of consumers’ bank power was eroded.
“We have hiked interest rates 10 times since November 2021. We don’t do this lightly, we recognize that this causes pain and hardship. But the value of eroded your bank power is more damaging and that’s why we have done it,” Naidoo said.
“But we won’t increase interest rates forever. We understand that there are limits, inflation is coming down and that is positive. It is close now to the top of our target range, but we want it to get closer to the midpoint of our target range.
“And once we are confident that it is approaching the midpoint of our target range, we are likely to stop hiking interest rates. We don’t want to do this forever, it is not our intention to do it forever. But we have to do enough so that we get inflation back towards the midpoint of our target range.”
South Africa remains behind the US in the quantum of interest rate hikes, with a 475 basis points increase compared to the 500 basis points lift in the Fed funds rate in the current cycle, with a risk of the interest rate differential widening.
Old Mutual Wealth investment strategist Izak Odendaal said interest rates had clearly not had much traction yet, despite rising faster and higher than at any point in the past four decades.
“Firstly, as we’ve often pointed out, interest rates work with a lag. Consumers and firms adjust to gradually rising borrowing costs, until they cannot anymore,” Odendaal said.
“Secondly, there are a number of pandemic-related distortions that make this cycle different form the past. Thirdly, interest rates in many countries are still negative in real terms. A very rough rule of thumb is that interest rates are only truly restrictive when they are positive in real terms.”
– BUSINESS REPORT
