With inflation forecast to rise more this year, economists warn that South African consumers could face further increases in the cost of borrowing.
This comes as elevated supply-driven inflation has pushed major central banks across the world to adopt a tighter monetary policy and aggressively hike interest rates.
The European Central Bank this week raised its three key interest rates by 50 basis points each, for the first time since 2011, in a bid to relieve inflationary pressures brought on by Covid-19 supply constraints, which were then exacerbated by the war in Ukraine.
The US Federal Reserve is on track to raise interest rates by another 75 basis points next week, after pushing back against expectations of a bigger 100 basis point increase.
In South Africa, the SA Reserve Bank (SARB) on Thursday raised the benchmark interest rates for a fifth time in a row after assessing the inflation outlook.
It raised the rate by 75 basis points – from 4.74 percent to 5.5 percent – above the consensus expectation of a 50 basis points hike.
This was the biggest rise in borrowing costs in almost two decades, or since September 2002, and rates have increased by a cumulative 200 basis points since November 2021 in a bid to tame price pressures.
This means that the prime lending rate will now increase from 8.25 percent to nine percent per annum.
Headline consumer inflation quickened to 7.4 percent in June, from 6.5 percent in May, the highest in 13 years – mainly driven by rising fuel and food prices stemming from global oil and food supply constraints due to the Russia-Ukraine war.
Under these hawkish conditions, economists have warned that consumers should brace themselves for yet higher interest rates this year amid accelerating global inflation.
Jeffrey Schultz, the senior economist at BNP Paribas South Africa, has been calling for more frontloading by the SARB, given much stickier inflation projections and upside risks building through wages and unit labour costs.
Schultz said the SARB was crystal clear that it was primarily concerned with nipping inflation and inflation expectations in the bud as the decision was split, with three committee members in favour of a 75 basis points hike.
He put a base case of a 75 basis points hike for September, but said the door was open for a larger 100 basis points hike should inflation continue to rise.
“We don't necessarily think that this changes our call for a seven percent terminal rate, but rather the timing, which could conceivably now be achieved by year-end versus our still well above consensus January 2023 forecast,” Shultz said.
Sustained policy accommodation, supply shortages and other restrictions have sharply increased the prices of many goods, services and commodities.
The SARB expects inflation to remain above the upper limit of its target range of 3-6 percent until the second quarter of 2023, and only revert back to mid-point by the fourth quarter of 2024.
A higher global oil price and rand weakness have contributed to higher expected fuel price inflation for this year at 38.9 percent, up from 31.2 percent.
Some analysts have questioned how raising interest rates aggressively would be effective in an environment of supply-driven inflation.
Unfortunately, the SARB only has one real policy tool at its disposal to combat the heightened inflation – raising interest rates.
Anchor Capital investment analyst Casey Delport said the SARB had no choice but to react with what they had at their disposal to try and combat the heightened inflation, as doing nothing would be far worse.
Delport said they did find 75 basis points hike a particularly aggressive move on the part of the SARB, but monetary policy was a difficult balance to achieve and the SARB would be walking a tightrope for the remainder of the year.
“Unfortunately, this will come with a cost to South African consumers, who are already facing increasing pressures that will inevitably dampen consumer spending and thus overall economic growth,” Delport said.
“Overall, the tone of the statement following this latest meeting was very hawkish and Thursday’s decision definitely comes across as a ‘statement hike’ on the part of the SARB, in order to attempt to make clear its credibility.
“At the end of the day, there is a limit as to how high rates can go and the SARB has to be cognisant of the detrimental impact of a rate-hiking cycle that is too severe on SA’s already strained economy.”
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