Interest rates in South Africa nearing the peak: experts
The South African Reserve Bank’s (SARB) hawkish stance remains justifiable in light of new inflationary data, says Luigi Marinus, a portfolio manager at PPS Investments.
The central bank has been stern over the past few months in maintaining its mandate of driving down inflation to within its target range of between 3% and 6% – with an ultimate goal of landing around 4.5%.
In the most recent Monetary Policy Committee meeting, the central bank decided to only increase short-term interest rates by 25 basis points, which may be seen as a signal that the hiking cycle is reaching an end.
The hike in late January pushed the repurchase rate to 7.25% and the prime lending rate to 10.75%.
This came after a full year of hikes, placing increasing pressure on cash-strapped consumers across the country – making it harder to borrow money or pay back loans. Since November 2021, rate hikes amounted to 375 basis points in total.
Marinus said that markets are now pricing in another 25 basis point increase.
He said that this could signal the end of rate hikes, assuming inflation continues on its downward trend back into the target range.
According to the latest inflation data released this Wednesday (15 February) by Statistics South Africa, annual consumer inflation has eased over the last three months – with the latest number decreasing from 7.2% in December 2022 to 6.9% in January.
This signals a continuation of the decline in inflation growth since the peak of 7.8% in July 2022, Marinus said.
“Although there was a decline in inflation growth, consumers would be concerned by the 13.4% increase in food and non-alcoholic beverages and the 2.3% contribution to inflation,” Marinus said.
“It means that even though food and non-alcoholic beverages make up 17.14% of the inflation basket, the contribution was a third of the total inflation increase over the year.”
Other large contributors to inflation were transport (1.6%) and housing and utilities (1.0%), he added.
Fuel prices have moderated, assisting motorists; however, public transport was hit hard with an 18% increase as rising costs were transferred to consumers, he said.
“The effect of the approved electricity price increase is yet to be included in the inflation print and will add to inflation when it comes into effect,” the portfolio manager added.
The Reserve Bank governor, Lesetja Kganyago, has repeatedly made it clear that the central bank will be unwavering in its duty to bring inflation to a sustainable level.
Faced with public backlash over the economic pressures induced by higher interest rates, Kganyago told CNBC that central banks have no choice but to deal with inflation as, in the long term, it has an overall better outcome for consumers.
He said that acting too late would be more costly.
Rate cuts heading into 2024 could be on the cards if inflation drops dramatically, said Nicky Weimar, Nedbank’s chief economist at the very start of this year (6 January).
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