Poverty alleviation groups, Cosatu and some economists have condemned the decision by the central bank to hike borrowing costs, in one case calling it “economic madness”.
But others noted that while the middle class was going to feel the pain of higher debt repayment costs, raising interest rates could help protect the poor from soaring prices brought about by rampant inflation.
Mervyn Abrahams, spokesperson for the NGO Pietermaritzburg Economic Justice & Dignity — which tracks monthly food prices — said he was disturbed that the South African Reserve Bank defended its interest rate hikes on the grounds that doing so protected wages.
“Debt servicing will increase; it will leave less money for food, transport and electricity. Increasing interest rates will only be taking away from wages. We are likely to see more labour unrest … as employees will have to pay more for transport, coupled with higher food and electricity prices. Consumers cannot cope any more,” Abrahams said.
The Bank’s monetary policy committee (MPC) on Thursday hiked the repo rate by 75 basis points to 5.5% from 4.75%, 25 basis points higher than most economists had predicted. It was the biggest hike in two decades.
The prime lending rate will rise to 9%, translating into higher debt service costs for consumers with home, credit and personal loans.
The move supports the Bank’s mandate of maintaining inflation between 3% and 6%.
Governor Lesetja Kganyago told journalists the Bank had acted to protect incomes from diminishing due to higher inflation.
“If there is persistence of rising inflation you can rest assured that the Bank will act with scale, timeously, to protect the incomes of South Africans,” Kganyago said.
The hike comes as consumer headline inflation leapt to 7.4% in June, the highest since May 2009, driven by transport and food.
StatsSA said this week that transport costs had risen 20% year on year in June, against 15.7% in May. It said the most significant driver of transport costs in June had been the petrol price, which rose another whooping 45.3% compared with 32.5% in May.
Daniel Meyer, a professor at the school of public management, governance and public policy at the University of Johannesburg, said the high inflation environment was driven from the supply side, not by demand. In this situation, increasing interest rates would “kill” the economy.
It will not stop rising electricity and petrol prices. The Bank will kill the economy and jobs
— Daniel Meyer, professor at UJ's school of public management, governance and public policy
“It will not stop rising electricity and petrol prices. The Bank will kill the economy and jobs,” he said.
Gilad Isaacs, a director at the Institute for Economic Justice, described an increase of this magnitude as “economic madness”.
He said the Bank was overreacting to a moderate rise in inflation and this was bad news because consumers were poorly placed to absorb rising costs.
“What is clear is that this decision is economic madness and the MPC should be losing sleep over the harm they are inflicting on all within South Africa, with the poor least able to bear this burden,” he said.
“Given where inflation is coming from, and given the dire economic circumstances, dampening local demand is a nonsensical response to a moderate increase in inflation.”
Cosatu said the rate hike would devastate millions of workers who are faced with increasing debt and other rising costs.
“It is a gut-wrenching blow to millions of workers drowning in debt and struggling to take care of their families. This is devastating for an economy that is still in a recession and struggling to emerge from Covid-19, steep fuel price hikes and rampant load-shedding,” it said.
Not all bad news
However, three other economists said the Bank had to act to protect people on the lower scale of the income ladder from inflation-induced price shocks.
Isaah Mhlanga, chief economist at Alexforbes, said it was in the middle-income class where “the pain is going to be felt” as this was the sector that tended to have the most debt in the form of credit cards, home loans and vehicle financing.
Mhlanga said the “poorest of the poor” needed to be protected from rampant inflation as they do not have ways to cushion themselves from rising prices.
He expected the repo rate to be at 6.25% by the end of 2023, meaning a further 75 basis points in hikes could be on the cards.
Matrix Fund Managers economist Carmen Nel said the Bank had to try to protect lower income groups from high inflation, which in some categories was already above 9%, and raising interest rates was a good option.
“Lower-income groups are not that sensitive to interest rates. They are not the ones with home loans or car loans. But they are lot more exposed to transport costs and most importantly food,” she said.
“To keep inflation contained, you have to sacrifice some growth in the short term.”
Dawie Roodt, chief economist at Efficient Group, said with food and fuel prices already high, the interest rate hike was “rubbing salt in the wounds” of consumers.
“We have the rising costs in the economy and now we have rising interest rates and it is going to add to the pain in the economy without a doubt,” he said.
But Roodt said it was important to take into account that a higher rate “for a short period of time”, while uncomfortable for consumers, was a better option than the “pain of high inflation over a long period of time”.
Roodt said raising interest rates was not the only option available to SA to reduce inflation, but it was politically difficult to look at alternatives such as making the economy more competitive, or Eskom and local authorities not hitting consumers with significant price increases.
“That leaves the Reserve Bank with interest rates as the only real alternative to get inflation down.”
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