The repo rate is now 8.25% after the latest increase of 50 basis points that sent the rand crashing to R19.73, far worse than it was last week when the US warned south Africa about trading arms with Russia.
The repo rate increased by 4.75 basis points since November 2021 when it stood at 3.5%. Consumers who bought houses or cars at this low rate, are now battling to make ends meet. For example, if you had a R1 million home loan before this interest rate hiking cycle started, you would have been paying R7 753 monthly. Now you will pay R10 837 per month, R344 more than last month and a whopping R3 084 more than two years ago.
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Although economists first expected an increase of 25 basis points and then changed it to 50 basis points when rolling blackouts became worse and the rand fell against the dollar due to a suspected arms deal with Russia, independent economist Prof. Bonke Dumisa says the Monetary Policy Committee (MPC) went overboard with their 50 basis points increase.
“The rand plunged to unprecedented worst levels immediately after the 50 basis points increase announcement, moving from this morning’s R19.32 against the US dollar to R19.65 by 3pm and R19.73 by 6pm.”
He also noted that the rand moved from R23.85 against the UK Pound this morning to R24.29 by 3:45pm and from R20.74 against the Euro this morning to R21.08 by 3:45pm. “We are in deep trouble,” he says.
Rand was already under pressure
Economic research group, Oxford Economics Africa, says the rand was already under immense pressure before the latest MPC meeting and plunged to its weakest level on record mere minutes after the MPC meeting concluded.
“The Sarb arguably faces an impossible scenario. With at least 1.5 ppts worth of rate increases yet to fully filter through to the real economy and CPI inflation forecast to return to the Sarb’s inflation target band by the end of the first half of 2023, together with the weak growth environment, additional interest rate increases could be too restrictive.”
Arthur Kamp, chief economist at Sanlam Investments, says two of the most significant risks to the interest rate outlook are changes in the rand and the outcomes of upcoming US FOMC meetings.
“Recent developments in the currency market are especially important, as rand depreciation can feed through into significant so-called second round effects whereby the initial impact of higher import prices on inflation is amplified by higher production costs and or wage demands.
“It is, therefore, concerning that the Bank warns that given upside inflation risks, larger domestic and external financing needs and load shedding, further currency weakness appears likely. That was before the rand fell so sharply this afternoon.”
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He points out that the Bank responds to the inflationary impact of rand weakness, rather than movements in the exchange rate itself.
“Overall, it cannot be guaranteed that we have reached the top of the interest rate hiking cycle. Much will depend on developments in the rand and its potential inflation implications, while the bank is also keen to see elevated inflation expectations moderate. Even so, despite the risks, this may still be the case.”
Bringing inflation under control
Luigi Marinus, portfolio manager at PPS Investments, says part of the reason that the MPC targeted a 4.5% level of inflation has been to bring about a moderation in inflation expectations.
“Inflation being sticky at around 7% and the forecast that the 4.5% level is only going to be achieved in the second quarter of 2025 has raised concerns that inflation expectations are not moderating. The direct practical implications are the effect on wage demands and continued rand weakness. The MPC has remained hawkish in the face of these concerns, possibly at the expense of GDP growth.”
Prof. Raymond Parsons, economist at the NWU Business School, says with the latest sharp fall in the rand, it was difficult to see how the MPC could have remained entirely passive in the face of recent inflation shocks.
“Borrowing costs are now at their highest since 2010. To squeeze inflation out of the system, monetary policy over time invariably makes lenders nervous, consumer and business credit costly, firms more risk-averse and invites unemployment which comes at a cost, at least in the short term. Adjusting to shocks, such as a sharp fall in the currency, is also nonetheless never easy or painless.”
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He pointed out that there are remedial structural factors in the economy in plain sight, that include successfully mitigating the shock of heavy Eskom load shedding, gradually lessening the impact of administrative prices and nuancing controversial geopolitical choices, as well as expediting other economic reforms.
Consumers now to look if car is affordable first
Lebogang Gaoaketse, WesBank’s head of marketing and communication says the increase will place indebted consumers under more pressure, making the prime lending rate the highest it has been since 2009 at 11.75%.
“Rising interest rates and inflation, brought on by a deteriorating rand and compounded by the power-supply crisis as well geopolitical concerns, will see buyers either postpone vehicle purchases, buy down or exit the new market altogether to find better value in the used market. Affordability will now become a key consideration in the purchasing decision for consumers.”
Andra Nel, marketing manager for brand and purpose at KFC, says one can only imagine that the impact on basic meals like bread and maize will be significant. “We have to as South Africans now pull together and do the little bit that we can for society as large.”
Frank Blackmore, lead economist at KPMG, says although globally and to a certain degree locally the pressure from food and fuel on inflation has eased somewhat, core inflation as well as service inflation remains elevated. In addition, the expectations around inflation or inflationary expectations remain unanchored to the target to 4.5% and are currently measured as 5.3% for this year.
“The good news is that we should start seeing or continue to see further reductions in inflation for the rest of this year. However, the risks to that inflationary rate remain on the upside, including obviously increases in import prices, based on the depreciation of the currency, as well as further currency weakness can be expected. Current account is also going to be seen to grow because of weakened exchange rate.”
Tertia Jacobs, treasury economist at Investec, says policies are now in a restrictive area and it will start impacting the demand side of the economy even more, with company earnings coming under more pressure in the context of input costs already under pressure with higher spending on diesel.