Unchanged repo rate means retailers have less of an ‘excuse’ to hike food prices

The unchanged repo rate gives retailers less of an “excuse” to hike food prices while consumers buckle under a crushing financial load as they profit.

“It is concerning that our food retailers seem to have been hiking their grocery prices and not dropping them in line with inflation coming down, especially with two-thirds of the nation struggling to put enough food on the table to feed their families. Food is not a nice-to-have for households, it is an essential item to keep people alive,” Neil Roets, CEO of Debt Rescue, says.

According to the Competition Commission’s latest Essential Food Pricing Monitoring report, South African retailers are more profitable than their counterparts in other countries and have maintained or bumped up their margins in the last four years, while international retailers have seen their margins thinning.

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Roets points out that while the commission conceded that there may be various reasons for this, including different levels of competition, it also picked up an ongoing “rocket and feather” effect in food pricing, where shelf prices shoot up amid high inflation, but take significantly longer to come back down, even if there is a rapid decline in inflation.

“I am concerned that, even with this reprieve from the South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC), it is simply a case of too little too late. The string of steep interest rate hikes earlier in the year led to steady and steep increases in loan instalments, leading to owners defaulting on vehicle and home repayments. We will likely see a higher number of defaults in the months to come, including on bank loans and credit facilities.”

Earlier in the year, Roets warned that the escalating cost of living will lead to soaring credit applications although the cost of borrowing is the highest it has been since 2008 and that the repercussions of this will be far-reaching.

Unchanged repo rate expected

Economic research group, Oxford Economics Africa, says the decision to keep the repo rate unchanged was expected. “The Sarb will want clear evidence that inflation is sustainably reverting to the mid-point of the target band of 3% to 6% before it considers lowering interest rates. As such, we do not anticipate any rate cuts before the second quarter of 2024,” Jee-A van der Linde, senior economist, says.

He points out that voting patterns were similar to the July meeting, when three members opted to keep rates on hold while two preferred a 25 basis points increase. In addition, the implied starting point for the Sarb’s rand forecast is now R18.45/$ compared to R18.13/$ during the previous meeting.

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Van der Linde found it significant that Sarb governor, Lesetja Kganyago, noted that the bank is broadly comfortable with the recent direction of headline inflation, but the pace of disinflation has been too slow. He also said that serious upside risks to the inflation outlook remain and reiterated that the MPC stands ready to act if necessary.

“The Sarb’s decision to keep the repo rate follows the US Fed’s hawkish hold and this morning’s Bank of England policy decision to do the same. We are not surprised by the Sarb’s hawkish bias with monetary policy still restrictive.

“Although inflation expectations came down to 6.1% for 2023, most recently, the MPC would prefer to see expectations anchored around the midpoint of 4.5%. The Sarb’s forecast shows that it expects inflation will rise in the near term before sustainably reverting to that level in 2025.”

As such, Van der Linde says, the group anticipates a prolonged pause by the Sarb at current high levels, consistent with the narrative from major central banks.

Split vote shows dedication to tackle inflation

Patrick Buthelezi, economist at Sanlam Investments, says the MPC continued to display a divergent opinion with three members advocating for a pause, while two preferred an increase of 25 basis points.

“Underscoring its dedication to addressing inflation, the MPC reasserted its commitment to steering inflation towards the midpoint of the inflation target range of 3% to 6%. Moreover, the monetary policy stance is restrictive.”

He points out that central banks globally stay focused on guiding inflation rates back to target.

“There is evidence that the impact of interest rate hikes is set to work as the latest inflation expectations for the Bureau for Economic Research slowed, albeit still far from where the Sarb would prefer, especially for businesses and labour.”

While the inflation targeting regime operates on a forward-looking basis, inflation expectations, on the other hand, are influenced by the latest inflation outcome, suggesting continued downward pressure can be expected, he says.

“The policy statement also highlighted measures the public sector can adopt to assist the MPC in guiding inflation lower, such as prudent fiscal policy, increasing energy supply, increasing administered prices in line with inflation target and keeping real wages aligned with productivity.”

Buthelezi says the repo rate produced by the quarterly projection model (QPM) increased by 21 basis points to 8.24%, which is nearly the current repo rate in 2023. However, it is lower for 2024.

“Looking ahead, the Sarb would probably maintain a restrictive monetary policy stance and start easing next year in the absence of upside risks.”