Consumers warned about rates hikesComment on this story
Johannesburg - Consumers should plan ahead to meet all their financial needs as interest rates may rise, economists warned on Thursday.
The SA Reserve Bank announced the repo rate will remain unchanged at 5.5 percent, but sounded a warning of increases to come.
“We are indicating that the interest rates are likely to rise in the future,” SARB governor Gill Marcus said in Pretoria, announcing the decision of the monetary policy committee (MPC).
“We do not see reducing rates on the cards at this time.”
She said the MPC was aware of the policy dilemma of rising inflation pressure in a subdued economic growth environment.
Chief investment strategist for Old Mutual Wealth, Dave Mohr, said consumers borrowing money now could be paying at least a percent more in interest by the end of the year.
“The economic circumstances are tough and consumers must watch out because job security is low,” he said.
“I think consumers need to recheck their spending budget for the year because there is continued downward pressure on spending power from increased inflation.”
He said it would be important for consumers to ensure they had enough money available to not default on financial commitments or savings products such as a pension.
Marcus told reporters that protracted work stoppages, electricity supply constraints and the slow adjustment of the current account deficit contributed to the rand's vulnerability to domestic “idiosyncratic factors”.
“Pass-through from the exchange rate to prices has been relatively muted to date but there is some evidence that it is accelerating,” she said.
“At the same time, the domestic economic outlook remains fragile, with the risks assessed to be on the downside.”
She said the committee would continue to focus on the medium term inflation trajectory and that the MPC was aware that too slow-a-pace of tightening could undermine inflation expectations.
Too slow-a-pace of tightening could also require more aggressive tightening in the future, she said.
FNB chief executive Jacques Cilliers urged consumers to act with care and to plan ahead for the remainder of 2014.
“The Reserve Bank has stated that its stance will remain accommodative to enable economic growth,” he said in a statement.
“However, as inflation rises we expect rates to be adjusted upward. In doing so, the Reserve Bank maintains our effective rates on an even keel.”
In January, the committee increased the repo rate by 50 basis points to 5.5 percent.
On Thursday, Marcus said the pace of tightening would depend on factors including projected inflation, inflation expectations, the state of the economy and global developments.
“We wish to reiterate that even though we are in a tightening cycle, there will not necessarily be a change in the stance at every meeting, and that the increments may not always be of the same magnitude.”
Marcus said the decision to keep the interest rates unchanged was not a unanimous decision.
FNB chief economist Sizwe Nxedlana warned that the South African economy remained vulnerable to rising interest rates in the United States due to its large current account deficit.
He said rising US rates would increase the difficulty of funding the current account deficit.
“This is likely to keep the rand under pressure and place further upward pressure on consumer inflation. Against this background interest rates are likely to increase further,” said Nxedlana.
“A minor silver lining may be that with growth in credit extension and in government spending slowing, the magnitude of interest rate increases may not be as much as in previous rate hiking cycles.”
He urged households to exercise “prudence in managing their household finances”.
Marcus said the domestic economic outlook remained subdued amid continued strikes in the platinum sector and the uncertainty regarding a stable and sufficient electricity supply in the coming months.
She said the most recent inflation forecasts suggested marginal improvements in the medium term. Upside risks to the inflation outlook persist despite the recent appreciation of the rand.
The SARB's forecast of headline inflation was unchanged for 2014, and was expected to average 6.3 percent, with the peak of 6.6 percent expected in the fourth quarter, she said.
The rand exchange rate has been relatively volatile, but there had been an appreciating trend, Marcus said. - Sapa