Homeowners will be the most impacted by the cost of borrowing in South Africa, which has risen to its highest in nearly 14 years, in spite of dwindling economic growth forecasts.
The South African Reserve Bank (SARB) yesterday shocked the market with a severely hawkish stance, and raised its benchmark lending rate by 50 basis points from 7.25% to 7.75% per annum.
While the markets had expected a smaller 25 basis points increase, this rate hike raised the prime lending rate from 10.75% to 11.25% per annum.
This was the ninth consecutive rate hike since policy normalisation started in November 2021, bringing borrowing costs to the highest since May 2009, in a bid to curb runaway inflation.
Headline inflation breached the upper end of the SARB’s target range of 3%-6% in the second quarter of 2022 and is forecast to remain above it until the third quarter of this year.
SARB Governor Lesetja Kganyago said this was a split decision as three members of the Monetary Policy Committee (MPC) preferred the announced increase, while two members preferred a 25 basis points increase.
Kganyago said inflation expectations had increased strongly over the past year, forcing the bank to revise its 2023 headline inflation forecast significantly upwards to 6% from 5.4% previously, due to higher prices of core goods and food in the near term.
However, Kganyago said food and fuel inflation was expected to ease, resulting in a headline forecast of 4.9% for 2024 and 4.5% in 2025.
“Headline inflation is only expected to sustainably revert to the mid-point of the target range by the fourth quarter of 2024,” Kganyago said.
“Despite some easing of producer price and food inflation, global price levels remain elevated.
“Load shedding may additionally have broader price effects on the cost of doing business and the cost of living, in particular as diesel consumption increases.”
North West University Business School economist Professor Raymond Parsons said higher borrowing costs were already beginning to take effect on many sectors of the economy.
“More importantly, the cumulative effects of previous interest rate rises now happen to coincide with an economy that is seen by many commentators to be on the brink of a possible technical recession,” Parsons said.
“It seems as if the downside risks to economic growth are beginning to broadly coincide with the upside risks to inflation.”
Kganyago acknowledged that the revised interest rate was now less accommodative and was more consistent with the current view of risks to inflation.
Owing to the rate hike, the monthly bond repayments over a 20-year term on a R1 million bond will increase by an extra R341, from R10 152 to R10 493.
Seeff Property Group chairperson Samuel Seeff said they were disappointed at the rate hike, but the property outlook remained stable.
“We believe the 50 basis points is a bit steep, and the SARB could have kept it to 25 basis points,” Seeff said.
“The higher interest rate will affect buyers and homeowners. It will result in higher repayments of home loans and other credit, and put further pressure on the cost of living and disposable income.”
As consumers take the beating over rising costs, analysts were fretting over whether the SARB’s move would mark the end of the hiking cycle.
Sanlam Investments economist Patrick Buthelezi said the SARB would probably pause and assess the impact on inflation and the economy.
“This possibly marked the top of the hiking cycle. However, this will hinge on inflation prospects and global developments. .
“The bar for policy easing is high. It would require inflation to slow and be sustained towards the mid-point.”
Meanwhile, the SARB forecast for gross domestic product (GDP) growth was lowered slightly to 0.2% from the 0.3% expected in January, as a result of extensive load shedding and logistical constraints which deduct 2 percentage points from growth this year.
This compares with the recent growth forecast by the International Monetary Fund of only 0.1%.
However, Kgyanyago said the economy was forecast to rebound and expand by 1.0% in 2024, up from 0.7%, and by 1.1% in 2025, up from 1.0% previously forecast.
“Economic growth has been volatile for some time and prospects for growth appear even more uncertain than normal,” he said.
“An improvement in logistics and a sustained reduction in load shedding, or increased energy supply from alternative sources, would significantly raise growth.”
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