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The repo rate increase is a blow to the property market and a disappointment for consumers, while it is also clear that it was a delicate balancing act as the South African Reserve Bank tries to normalise interest rates.
“The impact of the war between Russia and Ukraine is already having an obvious negative impact on South Africans as the cost of food, petrol, oil and electricity will increase significantly over the next three months,” says Marcél du Toit, CEO of Leadhome.
This means that fewer South Africans will be able to cope with high interest rates weighing on their ability to afford bond repayments.
“Given the significant increase in the cost of commodities, we expected the South African Reserve Bank (Sarb) to consider waving the interest rate hike. If this trend continues, we encourage buyers to view this period as a small window of opportunity if they are still keen to take advantage of relatively low interest rates before further increases,” Du Toit says.
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Economic research group, Oxford Economics Africa, says against a challenging backdrop of intense geopolitical tensions set off by Russia’s invasion of Ukraine, central bankers are likely to err on the side of caution as we progress with the hiking cycle.
“Global financial conditions have become increasingly volatile and major central banks have started to normalise policy rates. As such, capital flow volatility will remain high for riskier EM assets. Our US colleagues contend that the US economy can withstand the removal of policy accommodation, after the Fed cranked the policy levers with a 25 basis points interest rate hike in March, putting the Fed on a course to raise rates by 175 bps this year and another 87.5 bps in 2023.”
Oxford Economics say the move was well telegraphed and the Sarb’s reaction today was in line with the group’s expectations.
“The abrupt increase in domestic price pressures prompted us to bring our 2022 interest rate forecast forward.
“Specifically, we expect the Sarb will lift the repo rate by another 50 bps in the second quarter and a 25 basis points increase is slated for the third quarter, which will see the repo rate end the year at 5.0%.”
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Dr Andrew Golding, chief executive of the Pam Golding Property Group, says the Monetary Policy Committee (MPC) faced a particularly delicate balancing act this week. “By increasing the repo rate by a moderate 25 basis points for the third consecutive MPC meeting, the Sarb is trying to normalise interest rates in line with its stated strategy.”
He says while an unchanged repo rate would have been preferred, this moderate approach has in all likelihood already been factored in by the housing market.
“With heightened uncertainty and a worsening growth and inflation outlook, but a need to contain inflationary pressures and anchor inflation expectations, we believed the Sarb was unlikely to respond to the deteriorating inflation outlook aggressively.”
Attempting to tighten monetary policy to dampen price pressures but not derail the economic recovery was already challenging, but now the war in Ukraine has brought further uncertainty and financial market turmoil.
Golding says the war, coupled with the West’s sanctions against Russia, has sent global commodity prices soaring, while surging food and energy prices in particular have forced local analysts to revise their inflation forecasts.
“However, it is not only the deterioration in the inflation outlook applying pressure on the Sarb to hike rates. The US Fed also increased interest rates last week for the first time since 2018 as American inflation soars to a four-decade high.”
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He explains that rising interest rates in the West typically weakens the Rand, as capital flows out of emerging markets.
“This would normally weigh on the local exchange rate, making imported goods more expensive. This would be particularly serious at a time of soaring international oil prices.”
Golding warns that while the MPC has to dampen inflationary pressures and prevent any upward drift inflationary expectations, it will also have to consider the fragile state of the local economy.
“Despite a robust rebound in economic activity last year off a very low base in 2020, the economy has yet to fully recover from the impact of the severe pandemic-related lockdowns in 2020 and the growth outlook remains tepid, with the national economic growth rate forecast at, or below, 2% for the next few years.”
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