BRACE FOR ANOTHER INTEREST RATE HIKE THIS MONTH

In South Africa, consumers burdened with debt are expected to face more difficulties as borrowing costs are likely to rise in the coming months due to persistent consumer inflation. This is influenced by the recent signal from the US Federal Reserve to increase interest rates in order to combat high inflation in the US economy. Although the US rates remain unchanged for now at 5 to 5.25 percent, the South African Reserve Bank (SARB) has strongly indicated its intention to tighten monetary policy and implement another rate hike, albeit a small increase of 25 basis points.

Over the past year, the SARB has already implemented several rate hikes, totalling 75 basis points, in an effort to control high inflation, which reached 6.3 percent in May, exceeding the upper limit of the bank’s target range of 3 to 6 percent. This has brought the repo rate to its highest level in 14 years, at 8.25 percent per annum. Governor Lesetja Kganyago expressed the SARB’s expectation that inflation will gradually decrease and fall within the target range in the latter part of the second half of the year.

Although the SARB acknowledges that high interest rates cause hardships for consumers, it sees monetary policy as the most effective tool to address rising prices. The bank aims to achieve price stability at around 4.5 percent inflation. Kganyago emphasized that the intention is not to cause South Africans to lose their homes or cars due to increased interest rates, but to use interest rates as a means to combat inflation.

Amid these developments, the property sector has expressed concerns about the impact of interest rate hikes. RE/Max Southern Africa CEO Adrian Goslett reassured homeowners that the end of interest rate hikes may be on the horizon and encouraged careful budget management to avoid late or missed payments. The Deputy Governor of the SARB, Kuben Naidoo, acknowledged the hardships caused by high interest rates but emphasized the importance of preserving the value of consumers’ purchasing power.

Despite the significant increase in interest rates in South Africa, they have not yet had a substantial impact on the economy. The country lags behind the US in terms of the magnitude of interest rate hikes, with a 475 basis points increase compared to the 500 basis points lift in the US. However, there is a risk of the interest rate differential widening.

Overall, South African consumers are likely to face further challenges as borrowing costs increase due to inflationary pressures. The SARB aims to bring inflation back within its target range and intends to halt interest rate hikes once it is confident that inflation is approaching the midpoint of the range.

“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.”