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The Reserve Bank increased the repo rate by 75 basis points for the second time, in line with the similar increase by the US Fed, which brings the rate close to pre-pandemic levels.
This means that the repo rate will now sit at 6.25% and the prime interest rate at 9.75%.
Consumers will now pay more for credit and consumers with, for example, a home loan of R1 million with a repayment term of 20 years (to 0 future value), who are currently paying about R9 000 per month at prime, will now see their payments increase to R9 500.
Those with, for example, a monthly vehicle loan repayment for R500 000 paid back to R0 over a 5-year term at prime (9%) and currently paying R10 380, will now pay R10 560 per month, says Jacobus Lacock of Fairtree.
Three of the five Monetary Policy Committee (MPC) members voted for a 0.75% increase, while two members voted for a 1% increase, signalling that the MPC will remain vigilant in fighting inflation.
The MPC also made some downward revisions to their inflation and growth outlook and now expects inflation to average at 5.3% next year, from 5.7% at their previous meeting.
The MPC expects growth of 1.9% this year, from 2.0% at their previous meeting and inflation is only expected to fall back into the 3-6% target range by the second quarter of next year.
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“We believe that the South African Reserve Bank (Sarb) is on the right course to bring inflation expectations down to ensure that it does not spiral out of control. Globally it is the lower income households that will be most affected by inflation,” Lacock says.
Economic research group Oxford Economics Africa says the outlook for interest rates has not changed much and further policy tightening is expected during the coming meetings, as the Sarb aims to bring inflation expectations back to target.
“The South African economy has been fortunate not to experience a severe inflation shock when compared to other advanced economies. Global supply shocks have pushed headline inflation above the upper end of the target band this year.
“We look for moderate disinflation over the next few months, with base effects set to take effect in the second half of 2023, which will see the headline rate revert to the mid-point of the target range.”
Tertia Jacobs, treasury economist at Investec, says the accommodation provided during Covid, which saw the repo rate reduced from 6.25% to a record low of 3.50%, has now been fully reversed, with the policy rate back at 6.25%.
“The decision was hawkish in as much as two of the MPC members were in favour of a 100bps rate hike, which came as a surprise.”
ALSO READ: Reserve Bank left with little choice but to increase repo rate again
Carmen Nel, economist and macro strategist at Matrix Fund Managers, says the forecast revisions to the local inflation outlook were generally lower, with the bulk of the statement conveying a dovish tone relative to initial concerns.
“Given sequential large repo rate adjustments, it is plausible that the Sarb should be able to slow the pace of hikes in the fourth quarter moving by at most 50bp. This does, however, assume that the rand does not continue to weaken sharply.”
Neil Roets, CEO of Debt Rescue called the hike ‘shocking’ and says it was fuelled by rolling blackouts and downward pressure on the value of the rand.
“It is no surprise then that the latest repo rate hike has pushed consumers to new depths of despair, with the only outcome being even more cost-of-living increases, at a time when South Africans are no longer able to keep their heads above water and put food on the table.”
He says it is inhumane to place more financial strain on consumers at a time when a shocking 81% of South Africans are cutting down on daily meals because they can no longer afford three square meals per day.
ALSO READ: Repo rate pain not over: Another 75 basis point hike possible next week
Hayley Parry, money coach and facilitator at 1Life’s Truth About Money said it has been a rough week to be South African and she can see the hits keep coming.
“For example, the repayment on a R1 million home loan will be R488 more next month (increasing from R8 997 to R9 485 based on prime) and this is R1 276 more per month than before the MPC started hiking rates in November last year.”
She says in this kind of environment it becomes critical that we manage the money we do have, better. This means ensuring you have an emergency fund in place, you are paying off as much debt as possible and taking proactive steps to manage your cashflow as inflation pushes prices up across the board.
Frank Blackmore, lead economist at KPMG explains that the primary reason provided for the increase is that inflation, recorded at 7.6% in August, remains well above the Sarb’s target band of 3% to 6% and with the depreciation of the Rand, it is unlikely that inflation, especially of imported goods such as fuel, will fall by much any time soon. Inflation is also still being driven by food and energy more broadly.
ALSO READ: Slight decline good news for consumers, but inflation nightmare far from over
EY Africa chief economist, Angelika Goliger says although inflation has come off the boil slightly, it will likely be elevated for some time as firms try to make up in margins and recover the difference between consumer and producer prices (which reached 18.0% in July).
“The depreciation in the Rand over the past few days was more about a move towards the Dollar than shedding the Rand, but a weaker currency adds to the likelihood of inflation remaining stubbornly higher with the cost of imports rising.”
She says the Sarb, along with the rest of the world, will be watching the US Fed closely and, therefore, we can expect further rate increases at the last two MPC meetings for the year, perhaps at a similar pace of the US Fed, if inflation does not cool markedly.
“This will add further pressure on consumers in the near term, while it takes time for the higher interest rates to temper inflation.”
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