Consumers and businesses face a bumpy ride as steeper interest rate hikes may be on the cards amid high inflation due to the impact of the Ukraine war on global supply chains.
Experts say a 50 basis point hike in the repo rate is possible at the May and July meetings of the South African Reserve Bank's monetary policy committee. The consensus on the previous two decisions was for hikes of 25bp. The repo rate is currently at 4.25%.
This comes as South Africans are already under strain due to rising fuel and power costs. Commenting on rising food prices, the Consumer Goods Council of SA said that “the short- to medium-term outlook is uncertain and consumers may have to further tighten household budgets”.
Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa, said in the first quarter of this year there were signs of distress from consumers as they struggled to service debt raised during the festive season.
But on a year-on-year basis, the first quarter of 2022 was still better than last year, when the pandemic was in full swing. There have been fewer defaulters this year.
As the cost of living goes up, the first natural thing that you see is people utilising credit cards more. Similarly people with access facilities on their home loans, they're drawing down [cash]
— Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa
Van Jaarsveldt said the most affluent sector of the population is more exposed to distress than consumers in the lower segment, who do not have as easy access to credit.
The outstanding total consumer debt in SA is at about R1.97-trillion, with 75% of that being home and vehicle loans. There are 23-million consumers with credit.
Van Jaarsveldt said he expects the remainder of the year to be tough as consumers face significantly higher inflation and interest rates on the back of Russia’s war on Ukraine, which has also led to high oil and fuel prices.
Moreover, people who are exposed to large loans for secured lending such as mortgage bonds and vehicle financing will continue to feel the pressure. Similarly, those relying on public transport will suffer as taxi fares rise.
“As the cost of living goes up, the first natural thing that you see is people utilising credit cards more. Similarly people with access facilities on their home loans, they're drawing down [cash],” said Van Jaarsveldt.
“Salary increases are unlikely to match the high cost of living, hence people start drawing down on facilities they have and at some point you will start seeing defaults. Credit providers may lend less if they see there is distress in the market.
“What we foresee in future on the back of this ... is that consumers will be more distressed. It is going to be worse in the months to come,” he said.
For businesses, the resumption of load-shedding this week brings yet more pressure, and higher interest rates would also hurt.
Miyelani Mkhabela, CEO and chief economist at Antswisa Transaction Advisory, said steeper rises in the repo rate will mean some businesses may struggle to implement turnaround strategies of borrowing becomes increasingly expensive every month.
As a result, the number of distressed businesses will increase from the last quarter of 2022, he said.
Mkhabela said the rise in SA's annual inflation rate to 5.9% in March marked the 11th consecutive month in which annual inflation was higher than the midpoint of the Reserve Bank's inflation target range of between 3% and 6%.
This, he said, would “force the South African Reserve Bank to increase the repo rate by at least 25bp and at most 50bp”.
He said inflation-sensitive items relevant to SA such as edible oils, cereals and industrial equipment are in short supply due to the conflict in Europe and export bans by key producers. And the jump in fertiliser prices and other input costs has a direct impact on food prices in the country.
“Emerging and developing economies might experience a deep financial crisis from mid-2023 to first quarter of 2025,” said Mkhabela.
Raymond Parsons, a professor at the North West University School of Business and Governance, said that, given its firm anti-inflationary mandate, the MPC will see the latest surge in the producer price index (PPI) in March at over 11% as likely to push the consumer price index (CPI) by June beyond its 3%-6% inflation target range, perhaps to 6.3%.
Moody’s projects SA's inflation rate to rise to about 8% this year and then to recede in 2023-24. Moody’s said the Reserve Bank would likely continue to tighten gradually after raising the repurchase rate by 25bp to 4.25% on March 24, marking 75bp of cumulative tightening since August 2021.
Parsons said the MPC will get the April consumer inflation figure just before its May 19 meeting. “Therefore a further rise in interest rates and borrowing costs is inevitably on the cards for now. What needs to be particularly watched are the trends in core inflation and wage inflation.”
Trade unions representing public service employees this week tabled wage demands of a 10% increase for SA's 1.3-million civil servants.
Parsons noted the Absa quarterly review that cautioned that too steep a rise in interest rates now carries higher downside risks for a weakened economy.
“It is clear that, if the MPC now is too aggressive on interest rates, there is a greater danger of ‘stagflation’ — high inflation combined with high unemployment — developing in the SA economy.
“The MPC on May 19 therefore faces a particularly tough call to make on the pace at which borrowing costs should be further raised in SA, in the light of the trade-offs now involved,” Parsons said.
Deal Leaders International CEO Andrew Bahlmann said when the MPC decided to raise interest rates 25bp to 4.25% a month ago it gave plenty of indication that steeper hikes could be on the way.
“That is what I believe we will see this month”.
Bahlmann said he expects rates to increase 50bp in May and July. “I forecast policy rates ending 2022 at 5.75% and a rate of 6.50% by the end of 2023”.
He said inflation is rising too fast, and a more aggressive monetary policy is certainly necessary to nip inflation in the bud at a time when the economy and asset prices are strong enough to withstand a reasonably faster pace of tightening.
“There has been no let-up in the negative macroeconomic environment — the Russian invasion of Ukraine and associated economic impact will continue to create additional upward pressure on inflation and weaken economic activity in the near term.
“There is of course a balancing act to contain inflation expectations and prevent steep interest rate hikes in future, but to simultaneously avoid choking the ongoing fragile economic recovery — but I believe the medicine should be taken now.”
Casey Delport, investment analyst at Anchor Capital, doubts that a 50bp rate hike will curb inflation or inflation expectations more than the two recent 25bp rate hikes, and may weigh on a still-fragile growth recovery that could ultimately be curbed even further depending on how the war unfolds.
“Therefore, considering the March rate increase, we forecast another 75bp-100bp of repo rate hikes. This will bring the repo rate to 5%-5.25% by the end of 2022. We also acknowledge the risk of a front-loaded 50bp rate hike in May should more concrete signs of second-round domestic price effects emerge.”
Delport said SA's growth momentum appears to have been robust in early 2022, but he remains concerned that growth could potentially soften materially from the second quarter of the year onwards as the combined impact of higher inflation and interest rates start to squeeze household income, and non-commodity export volumes feel the drag of softer global growth.
“Nonetheless, we still expect the repo rate to rise to at least 6% over the next two years, although the unpredictability of the war in Ukraine makes it particularly hard to forecast the exact timing of each rate hike.”
Rates are also rising elsewhere in the world. The US Federal Reserve hiked rates by 50bp on Wednesday, and central banks in the UK, India and Australia also increased their interest rates this week.
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