Johannesburg - As the Monetary Policy Committee meets to discuss inflation and whether or not to raise the repo rate, economists are warning that the poor would be hardest hit if it hiked rates.
The MPC will announce its decision tomorrow afternoon as the country grapples with low economic growth – projected to come in at under a percent this year – and steeply increasing food prices, which many expect to filter through to inflation.
Razia Khan, chief economist for Africa at Standard Chartered, is forecasting a hike of 0.5% to come through, which would take the repo rate to 7.25 percent and the main lending rate to 10.75 percent.
Khan notes analyst expectations have been split between no change and a 25 basis point hike for some time.
“We now see a strong likelihood of more tightening from the Reserve Bank, perhaps as much as 50bps, on March 17. This is meaningfully different from our expectation of no change only a few days ago.”
As perceptions of political risk in South Africa alter, and the South African rand comes under further pressure, Khan believes the South African Reserve Bank will need to act earlier, and perhaps more aggressively, to underscore its commitment to a 3-6 percent inflation target.
The rand is currently hovering around 16 to the dollar, having been hit by an apparent spat between Finance Minister Pravin Gordhan and the Hawks over a so-called rogue unit at the South African Revenue Service.
Khan notes “there are risks to our view. South African growth is weak. In the past quarter, both the Reserve Bank and the Treasury have revised down their official growth forecasts for 2016 to only 0.9 percent. Weak performance in mining and manufacturing mean that the risks, even to this growth forecast, are to the downside.
“Relative to the SARB’s estimates of potential output in South Africa, a negative output gap is currently in place.”
The Reserve Bank has already raised rates by 0.75 percent since November.
“Some might suggest that this front-loading of tightening means that the SARB can now raise rates at a more modest pace, especially given the downside risks to growth. Given the lag with which interest rate tightening impacts the real economy, however, we believe that SARB forecasts set out a case for earlier action, with more front-loading of planned tightening,” says Khan.
However, this would be bad news on several fronts, say other commentators.
DebtBusters CEO Ian Wason says an increase will knock low-income earners earning less than R5 000 per month into an even worse financial situation than they are already facing. “Our figures show that it’s often the poor that are hardest hit by debt. Low-income earners have 80 percent plus of their debt as unsecured, expensive debt. Our latest stats show that these consumers require 146 percent of their net income to pay their monthly debt repayments (before debt counselling),” says Wason.
A repo rate hike always results in an increased cost of borrowing for consumers, as banks immediately increase the cost of home loans, vehicle finance, student loans, personal loans, store cards, credit cards and any other type of credit or loan that is linked to the repo rate.
“That’s not the worst of it though,” says Wason. “The timing of this rate hike is extremely bad for low income earners for a number of reasons. Firstly, consider that the debt-to-income ratio among these consumers is already too high, leaving little or no money for living expenses. Secondly, review how much these consumers have already had to endure this year, two consecutive hikes in the repo rate on the back of Christmas spending and food inflation caused by the worst drought SA has seen in over a decade. Now, add the final blow, the knock on effect of increases in the petrol levy (1 April), Eskom’s 9.4 percent increase in electricity (1 April) and another repo rate increase. All which will result in further increases in the cost of food, transport and rental as stores, transport operators and landlords try to pass along the cost of their increased expenses onto consumers.”
Consumer price index (CPI) figures reveal that, so far this year, South Africans have had to absorb on average a 6.2 percent year-on-year increase in electricity, food and transport. The latest Pietermaritzburg Agency for Social Development (Pacsa) report reveals that since January, the price of a 25kg bag of staple food for poor families - maize meal - has increased by 12 percent.
Adds Dawie Maree, head of information and marketing at FNB Business, Agriculture: “Farmers that are still recovering from the impact of the drought would be hardest hit by a hike in interest rates given that the electricity tariff increase and tyre levy are coming into effect in April and October respectively.
“Furthermore, if the price of meat continues to increase, there will be a push back from consumers who will avoid eating out, directly affecting restaurants and retailers.”
Yudhvir Seetharam, head of Analytics at FNB Business, notes that apart from the direct impact on SMEs’ cash flow and ability to service debt, interest rate increases hamper consumer confidence, their ability to spend and save; which ultimately has a direct impact on the bottom line of small businesses.