Experts have warned consumers to be prepared for another interest rate hike at the next Monetary Policy Committee (MPC) meeting taking place in July.
EXPERTS have warned South African consumers to be prepared for another interest rate hike at the next Monetary Policy Committee (MPC) meeting taking place in July.
The news follows the announcement by the US Federal Reserve Bank that the interest rate in that country would be increased by 75 basis points to a range of 1.5% to 1.75%, a hike not seen in almost 30 years.
Experts have cited inflation and the crisis in Ukraine as reasons for the US interest rate hike and expect the South African Reserve Bank to follow suit.
Professor Irrshad Kaseeram, of the University of Zululand’s Economics Department, said that the inflation rate had gotten out of control in America, and with lower economic growth, it was a serious problem.
“It was necessary and 75 basis points is a very high increase. In fact we haven’t seen the interest rate in America reach such high levels since the 1970s and the 1980s. We have to admit that America has one of the largest, if not the largest, economy in the world and whenever their interest rate goes up it does affect other countries’ economies.
“A major concern is the value of assets will decrease and we could be seeing investors pulling their finances out of emerging economies such as South Africa and investing them in America and more developed economies.”
Kaseeram added that the South African Reserve Bank would increase the interest rate at the next MPC meeting.
“The rand exchange rate will be affected by the interest rate hike in America and imported inflation costs will increase, which will impact the inflation rate in South Africa. This in turn will lead the South African Reserve Bank to increase the interest rate.
“If there is another interest rate hike consumers will find themselves paying more for mortgages, car finances and higher purchases. The problem is that with the rising cost of inflation, unfortunately salaries and wages do not go up at the same rate.”
Dr Sanele Gumede, a senior economics lecturer at the University of KwaZuluNatal, said that with the interest rate hike in America, more cash flow was expected into the American economy and this would affect trade in South Africa.
“We can expect the South African Reserve Bank to increase the interest rate to ensure that money stays in the South African economy. America’s economy is still recovering from the Covid-19 pandemic, and it can be expected that relief measures were implemented to help the economy and it was necessary to raise the interest rate to help rising inflation in that country.”
Gumede added that it was different in South Africa, where we have a cost-push inflation scenario which is affected by higher oil prices, higher fuel prices and in turn leads to higher cost prices when doing business.
“The interest rate hike may be something that is necessary, but it is something that I would not advise the South African Reserve Bank to do as it will take away money from the consumer and the consumer is dealing with so much – they are faced with rising costs of fuel, higher food prices, increase in the electricity tariffs and generally paying more for goods.”
Professor Bonke Dumisa, an independent economic analyst, said that it was shocking to see how high the inflation rate had risen in America.
“The inflation rate in America is actually higher than the inflation rate in South Africa. In South Africa the inflation rate is at 5.9% and in America the inflation rate is at 8.6%, so you understand the need for an interest rate hike in America to curb rising inflation costs. The problem for us in South Africa is that our interest rate is much higher than America’s, our interest rate is at 4.75% while America’s interest rate is at 1.5%, and if our interest rate goes up the consumer will pay more for everything.
“I expect the interest rate to be increased by 25 basis points by the South African Reserve Bank. I can’t see them pushing the interest rate to above 5%, it will be too much for the South Africa consumer.”
