South African consumers may be faced with steeper loan repayments as the SA Reserve Bank (SARB) has not ruled out implementing yet another interest rate hike in May, making life difficult amid volatile economic and financial conditions.
The SARB’s Monetary Policy Committee (MPC) on Thursday delivered a surprise 50-basis point hike on sharply higher inflation forecasts, raising the cost of borrowing to its highest in nearly 14 years.
Of the 20 economists surveyed by Thomson Reuters, none had forecast a 50 basis points increase.
The SARB’s benchmark lending rate thus rose from 7.25% to 7.75% per annum, taking the prime lending rate higher from 10.75% to 11.25% per annum.
This was the ninth consecutive rate hike since policy normalisation started in November 2021, which has raised the interest rate by 425 basis points since then, bringing borrowing costs to the highest since May 2009.
This is a bid to curb runaway inflation which remained stubborn at 7.0% in February from 6.9% in January.
SARB Governor Lesetja Kganyago said guiding inflation back towards the mid-point of the 3-6% target band can reduce the economic costs of high inflation and enable lower interest rates in the future.
However, Kganyago said it might be too soon to tell when the rate cycle hike would end as the harsh economic conditions were expected to persist, at least in the short-to-medium-term.
“If we only knew the top, we would be able to tell you how far we are from the top,” Kganyago said.
“The problem is, there are so many moving parts: foreign interest rates, foreign inflation imported into our rand, our own idiosyncrasies with our own inflation, volatility in the financial markets, financial instability in the regional banks in the US.”
Everest Wealth Management’s head of product development, Thys van Zyl, said increasing the interest rate was not the answer to suppress inflation and instead focus should be placed on larger problems such as load shedding to bring inflation under control.
“South Africa has bigger problems at this stage in the form of ongoing load shedding, which has a tremendous impact on inflation, cost price inflation, transport costs and the general cost of living of consumers,” Van Zyl said.
"If we cannot reduce load shedding's impact on inflation, we will not be able to bring down stubborn inflation - even if the interest rate is raised three or four more times. The interest rate has been raised so many times over the past 16 months, and it is clear that it is not working to curb inflation.”
The interest rate hikes mean that consumers must reach even deeper into their pockets, with credit card and store debt becoming more expensive and personal loans and car and home payments rising.
After the SARB raised rates more than expected, economists are now divided on whether this would be the final rate increase before the central bank slows its hiking cycle.
Efficient Group economist Dawie Roodt said the SARB’s announcement would likely not be the final interest rate increase before a respite and that South Africans can expect another hike in two months.
“Depending on what happens with inflation, the last increase in this cycle should be in a couple of months' time,” Roodt said.
“With a bit of luck, we could see the Reserve Bank deciding to cut interest rates by the second half of this year. This will depend on, for example, the exchange rate of the currency and the international oil price.”
Bank of America’s sub-Saharan Africa economist, Tatonga Rusike, said they had a strong conviction that hikes would be ending in March, staying flat for the remainder of the year.
Alas, Rusike said the SARB thinks that South Africa was not yet “at the top of Table Mountain just yet”.
“Given the hawkishness of SARB in the March meeting, we think that, perhaps, one more hike could still be in store, 25 basis points in May,” Rusike said.
“We believe that with our terminal rate of 8% in 2023, we are likely to see 100 basis points worth of cuts in 2024 in order for the policy rate to return to 7% level by year-end 2024.”
However, Absa’s senior economist, Peter Worthington, said he believed this likely represents the peak, but there was a risk of still more tightening.
“We believe 7.75% is the peak of the hiking cycle but acknowledge some risk of a little more tightening,” Worthington said.
“We see cuts starting in March 2024, but now forecast a higher terminal rate of 7.0%.”
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