The rand weakened to another all-time low, plunging to R19.65 to the dollar, surpassing the key R19.52 mark reached last Friday, after the South Africa Reserve Bank (SARB) Governor Lesetja Kganyago administered “bitter medication” to indebted consumers.
Kganyago on Thursday said the cost of borrowing would increase even further on the back of deteriorating inflation outlook due to the weak exchange rate and the possibility of heightened power cuts.
The SARB’s Monetary Policy Committee (MPC) unanimously decided to increase its benchmark lending rate for the 10th consecutive time in two years.
The bank hiked the repurchase rate (repo rate) by 50 basis points from 7.75% to 8.25% per annum, meaning that the prime lending rate will now increase from 11.25% to 11.75% per annum.
The central bank has now hiked rates by 475 basis points of tightening since its hiking cycle began in November 2021.
This has pushed borrowing costs to their highest level since May 2009, in spite of consumer inflation softening to a 11-month low at 6.8% while producer inflation slowed to its lowest in 18 months at 8.6% in April.
However, Kganyago said the bank had to remain hawkish as inflation had remained sticky and above the top end of its target band of 3-6% per annum.
He said risks to the inflation outlook were assessed to the upside as global price inflation remained high, despite easing of producer price and food inflation.
For the first time, Kganyago admitted that the monetary policy was no longer accommodative but had turned restrictive.
“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation and risks,” Kganyago said.
“The policy stance aims to anchor inflation expectations more firmly around the midpoint of the target band and to increase confidence of attaining the inflation target sustainably over time.
“Guiding inflation back towards the midpoint of the target band can reduce the economic costs of high inflation and achieve lower interest rates in the future.”
Kganyago cited concerns regarding the significant depreciation of the rand and the mounting pressures of inflation as key drivers behind the rate adjustment.
He said the rand has weakened over the past year, with further sharp depreciation in recent weeks, with the implied starting point for the rand forecast at R18.68 to the US dollar, compared with R17.80/S1 at the time of the March meeting.
He said load shedding might additionally have broader price effects on the cost of doing business and the cost of living, in particular as diesel consumption increases on deteriorating generation capacity.
Kganyago said interest rates were a necessary evil on the back of uncertain and volatile economic prospects.
As a result of the latest 50 basis points interest rate hike, monthly repayments on a R1 million bond over a 20-year term will increase by approximately R344, from R10 493 to R10 837 a month.
Seeff Property Group chairperson Samuel Seeff said this rate hike was an economic killjoy and burden for homebuyers as the rapidly rising borrowing cost had put a dampener on the market.
“First-time homebuyers, many from the emerging middle class, are facing affordability challenges, and overall sales volumes have declined, more in some areas and to a lesser degree in other markets such as the Cape,” Seeff said.
RE/MAX Southern Africa CEO Adrian Goslett concurred and said this interest rate hike might push many consumers beyond what they can afford.
“We have already noticed the shift in the property market where we are receiving more enquiries from sellers and less interest from buyers,” Goslett said.
“Every interest rate hike reduces consumers’ spending power and their affordability levels get placed under further pressure. A hike like this is likely to cause activity within the property market to tighten even further.”
Meanwhile, the SARB revised its forecast for gross domestic product (GDP) growth slightly higher than in March, at 0.3%, while growth forecast for 2024 and 2025 remained unchanged at 1.0% and 1.1%, respectively.
Kganyago said energy and logistical constraints remained binding on growth outlook, limiting economic activity and increasing costs, with load shedding alone estimated to deduct 2 percentage points from growth this year.
“We’ve got a sick economy. It’s suffering from inflation. We’ve got to take the medication. The medication might be bitter, but if the patient does not take the medication, they will end up in surgery and in intensive care,” Kganyago said.
“Our task as the SARB, acting in accordance with our mandate that says we must preserve price stability in the interest of balanced and sustainable growth, (has) had to deal with this challenge.”
North West University Business School economist Professor Raymond Parsons said successfully mitigating load shedding, gradually lessening the impact of ‘administrative prices’, nuancing controversial geopolitical choices, and expediting other economic reforms were the remedial structural factors needed by the economy.
Parsons said the SARB had thus had to combat inflation when several of the drivers of both inflation and growth in South Africa lay outside of its control.
“The burden of reducing inflation in the economy cannot, therefore, continually be placed entirely on the shoulders of the SARB. It needs a holistic approach,” he said.
“A more cohesive and co-ordinated overall official effort to reduce highly elevated policy uncertainty in South Africa would help to lower the costs of doing business, boost investor confidence and underpin growth,” he said.
BUSINESS REPORT