The South African Reserve Bank is expected to hike rates yet again this week, as it continues to wage war against high inflation – but experts say it’s time to change tack because there’s no winning the battle while load shedding persists.
South Africans need to gird themselves for a double blow this week. While inflation data on Wednesday (24 May) showed a slight drop in CPI for April 2023 to 6.8%, the figure remains firmly outside the SARB’s target band of 3% to 6%, with food inflation sticking at higher levels.
Inflation in South Africa has remained stubbornly high even as global conditions have become more favourable. According to Thys van Zyl, head of product development at Everest Wealth, this is because consumers are paying the premium for the government’s missteps.
Load shedding is the obvious anomaly that sets South Africa apart from global trends. The SARB estimates that load shedding is adding as much as 0.5% to inflation by driving up costs throughout the country’s production and supply chains.
It is also a significant contributor to negative market sentiment, pushing up the rand exchange rate versus the dollar, also contributing to high levels of inflation as the South African economy tends to be a net importer of goods.
However, Van Zyl said that Thursday’s rate hike could be even higher than expected due to the rand having recently weakened to a historic low against the dollar following allegations that South Africa supplied arms to Russia.
He noted that political instability is hurting consumer and business confidence, and since the beginning of the year, investors have sold billions of rands in South African shares and bonds, and there has also been an increase in the sale of the country’s fixed assets.
This has left the SARB in the unenviable position of having to counter elements beyond its control using the only tool it has – rate hikes.
The Reserve Bank has thus far hiked rated by a total of 425 basis points since it started the hike cycle in November 2021, with the prime lending rate already above 11% for the first time in 14 years.
Economists anticipate another 25 or 50 basis point hike on Thursday, marking the tenth consecutive increase.
Making matters worse, stubborn inflation, continued load shedding and continued political instability and uncertainty have paved the way for even more increases down the line, Van Zyl said. This sentiment was also expressed by the Bureau for Economic Research (BER) this week, when the group said that May’s hike might not be the last.
“Thursday’s decision to hike the interest rate will not only be to try to further combat inflation but also to protect the rand due to poor government decisions. The Reserve Bank commissioner already said after the previous interest rate hike that everything possible must be done to stabilize the rand,” Van Zyl said.
However, the wealth manager noted that the Reserve Bank’s moves might prove ineffective, adding that if load-shedding’s impact on inflation cannot be reduced, persistent inflation will not be brought down – even if the interest rate is hiked three or four more times.
“The Reserve Bank will definitely have to start looking at other options than just applying interest rate hikes. Proactive thinking will have to be done to see how it can be made easier for cash-strapped consumers with the cost-of-living skyrocketing,” he said.
The wealth expert said that another big increase could be the nail in the coffin for many consumers who simply can’t afford it anymore and could lose their homes and livelihoods.
“(Rate hikes are coming) while salaries do not keep up with inflation and (households carry) the burden of additional increased expenses due to the rise in food prices and power tariffs. Consumers will also struggle more and more to keep up with their debt repayments,” he said.