Repo rate still highest since April 2009, could still increase

Although it is good news for consumers that the repo rate was left unchanged on Thursday, South Africa’s interest rates remain at the highest level since April 2009. The impact of high interest rates is showing, while previous rate increases have yet to fully filter through to the real economy.

The Reserve Bank has decided to keep the repo rate at its current level of 8.25% per year after Statistics SA announced on Wednesday that inflation decreased by almost one percentage point in June to 5.4% from 6.3% in May. This means that the prime lending rate will remain at 11.75%.

Economic research group Oxford Economics Africa says indebted South Africans will sleep easier tonight knowing that their interest expenses will not go up as a consequence of another interest rate increase but warns that the effect of previous increases have not affected consumers yet although the impact of the past 10 increases is beginning to show.

“Given weak domestic demand, further tightening would more than likely have been too restrictive, but an uncertain inflation outlook means South Africa is not out of the woods yet and monetary policy easing is still some way off,” the group says.

ALSO READ: Repo rate unchanged thanks to inflation moderating

Tertia Jacobs, treasury economist at Investec, says the decision of the Monetary Policy Committee (MPC) to keep the repo rate unchanged – for the first time since the rate hiking cycle started in November 2021 – was a close call.

“The decision was balanced between a somewhat better inflation outlook, mainly as a result of the last two inflations prints coming out better than expected and the return of headline CPI inflation within the target band, while core inflation also came in a bit better.

“This was balanced again against the risk assessment which continues to be to the upside and here the important dynamics are tighter global financial conditions which could keep the rand vulnerable in the context of the current account deficit.”

Jacobs notes that the economy remains quite weak and in this context, there are higher fiscal risks that have a bearing on the country risk premium. “We do think that the rate hiking cycle has peaked, but each meeting will remain quite challenging in terms of how the inflation print plays out.”

Many risks to inflation

Frank Blackmore, lead economist at KPMG, says there are many risks that could lead to another increase in inflation. “However, the most recent inflation rate for June at 5.4% showed that the monetary policy was restrictive enough to reduce inflation and this is expected to continue over the rest of the year. The governor did state that this may not be the end of the hiking cycle and they will react to the most recent data at each of the meetings that are yet to come.”

Brina Biggs, senior manager at 1Life Insurance agrees that this is probably not the end of the interest rate hiking cycle, which is still only expected early next year. “Yet, we have to remember that while inflation is at a 20 month low, the reality is that any increase here will mean more pressure on consumers down the line.

“We must consider load shedding and inflationary factors such as CPI and retail sales among many that can cause changes to the outlook. Therefore, we urge consumers to stay the course as we adapt the saying to ‘watch the cents and the rands will take care of themselves’, as we continue to weather the storm of our current high cost of living.”

ALSO READ: Inflation decreases by almost one percentage point in June

Hayley Parry, money coach at 1Life’s Truth About Money, says keeping the repo rate at its current level means if you were looking for a higher interest rate on your savings, you will not get it, but for consumers repaying any kind of debt, whether it is a home loan, car loan, store cards, credit cards or overdraft, it means that they will not pay more to service it.

“That is great news for your wallet, your bank account and for the time being there is no need to find out how we need to tighten our belts just yet.”

She challenges consumers who would have found the money to pay more for their debts to find that money anyway and pay it towards those debts to pay them off faster.

Is this top of repo rate hiking cycle?

Arthur Kamp, chief economist at Sanlam Investments, says it is unclear whether this is the top of the interest rate hiking cycle as Reserve Bank Governor Lesetja Kganyago also warned that future changes in the repo rate would be data dependent. “The Bank is, therefore, leaving the door ajar should it need to hike again.”

He says much will depend on the future inflation trajectory and he believes that progress from here is likely to be slower. “For now, though, based on the current inflation forecast, there seems to be enough reason to believe that we have seen the peak of the interest rate hiking cycle.”

Although the Bank’s forecast shows inflation is only expected to return to 4.5% (the Bank’s effective inflation target) by 2025, in the current environment of virtually no real GDP growth and soft real credit extension it is probably better to guide inflation back towards the inflation target over a longer period than usual, as opposed to risking excessive damage to the economy by trying to reach the target quickly, he says.

ALSO READ: Latest statistics show how tighter monetary policy takes effect

Farzana Botha, segment manager at Sanlam Risk and Savings says the rising cost of living meant that even consumers who had some disposable income in the past struggle to find room in their budgets as salaries struggle to keep up. 

“However, there are some aspects of your finances which benefit from higher interest rates. For example, the interest earned on your retirement savings may potentially be higher and because the interest in your retirement annuity (RA) does not incur tax, the growth is favourable by comparison to a taxed investment vehicle such as a unit trust.”

Prudent break from repo rate hiking cycle

Kim Silberman, economist and macro strategist at Matrix Fund Managers, says it is prudent at this point to take a break from hiking to assess the cumulative effects on inflation. “According to the Sarb’s projections, if rates remain on hold, the real repo rate will rise to 3.25% by mid-2024, which would be extremely restrictive from a growth perspective.

“Consequently, we think this will be the end of the hiking cycle. We expect that while global financial conditions remain tight, South Africa may be forced to keep real rates near these levels but as the global recession brings developed market rates lower, the Sarb can consider rate cuts.”