South Africa’s inflation may have increased for the second consecutive month in September, but some experts believe that there is still a strong argument to keep the repo rate stable next month.
While the acceleration of inflation to 5.4 percent from 4.8 percent in August is noted, the Seeff Property Group strongly urges the South African Reserve Bank (SARB) to keep the interest rate unchanged.
Although inflation is nearing the upper level, chairman Samuel Seeff says it is still within the 3 percent to 6 percent target range, so there is room for the Bank to hold off on another hike.
“A further rate hike at this stage – even just a speculated 0.25 percent hike, would have a negative impact on already overburdened consumers, the economy, and property market.
“The inflation volatility is not due to consumer spending in the economy but imported factors such as fuel and other costs hikes, and the continued weak confidence in the economy. These are beyond the control of consumers and homebuyers who are essentially being punished.”
The bad news though, is that the Bank of America believes the SARB may indeed implement another hike of 0.25 percent next month. Global oil prices, the instability of the rand, and the recent bird flu outbreak are the major reasons for this production
“A combination of rising oil prices, a higher-for-longer rates narrative, and fiscal risks in emerging markets are likely to weaken emerging market currencies further, and a stronger dollar should continue to weaken the rand, in our view,” it says.
Angelika Goliger, EY Africa chief economist, says the conflict in the Middle East, beyond the human tragedy, has also introduced a new source of volatility in global markets, causing fluctuations in oil prices and currencies. However, there are valid arguments for the SARB to keep the repo rate at 8.25 percent.
“Firstly, the surge in September's inflation could be temporary and the effects of previous rate increases may still need time to fully manifest in prices. In addition, the US Federal Reserve's dovish statements suggest that they are inclined to maintain their current policy rate, which could influence the MPC's decision.”
Nevertheless, she says the probability of a 0.25 percent rate hike at the November meeting has increased, based on current circumstances.
“The SARB has been explicit in stating that risks to inflation are skewed to the upside. Moreover, the September MPC vote revealed a division, with two members favouring a 25 basis point hike. This indicates a hawkish stance within the committee. Considering the September inflation figure and global events, a rate increase seems to be the most likely scenario at this juncture, in my view.”
Of course, Goliger says, it is crucial to acknowledge that numerous factors can alter the outlook between now and the meeting on November 23.
“Both the SARB and South Africans will be closely monitoring developments over the next month.”
In July, when the prime lending rate was kept at 11.75 percent, SARB governor Lesetja Kganyago warned that interest rates in South Africa had “definitely not peaked”. When this peak would be reached would depend on inflation, he said, explaining that the Bank would continue to assess data and risk from one meeting to the next. Policy would then be calibrated based on those risks.
“So this is not the end of the hiking cycle. It all depends on the data and risks – that is what it boils down to.”
With the rate holding steady again in September, and only one more repo rate decision left this year, a hike may very well be on the cards next month, especially as inflation has increased for two consecutive months. In that July address, Kganyago said the Bank’s inflation trajectory had it averaging 6 percent this year, and then dropping to 5 percent in 2024 and 4.5 percent in 2025.
But Seeff says the “aggressive” rate hikes have done more damage than good to the economy, and “we simply cannot contemplate another rate hike at this stage, especially ahead of the busy retail and real estate season”.
Already, the retail market is being punished by the cost of living crisis. Stats SA data for August shows that, measured in real terms, retail trade sales decreased by 0.5 percent year-on-year, with the largest negative contributors to this decrease being general dealers, with a 3.8 percent decline, and retailers in hardware, paint, and glass, with a 5 percent decline.
Retail trade sales also decreased by 1.1 percent in the three months ending August 2023 compared with the three months ending August 2022. The largest negative contributors to this decrease were, again, general dealers (3.9 percent decline) and retailers in hardware, paint, and glass (6.7 percent decline). Sales declines were also seen in the pharmaceuticals and medical goods, cosmetics, and toiletries categories during this period.
Stats SA data further reveals that motor trade sales decreased by 2.1 percent year-on-year in August 2023, with the largest negative annual growth rates recorded for:
- new vehicle sales (11.0 percent decline)
- used vehicle sales (5.7 percent decline)
- workshop income (4.8 percent decline)
The rate hikes are also taking their toll on the property market as they have dampened sales volumes back to levels last seen three years ago, Seeff says.
“Even the strong Cape Town market has seen a slow-down.”
That said, there is still ample activity in the market, and agents are encouraged by the continued support of the market by the banks.
“Approval rates are still up, and deposit requirements down compared to three years ago. Qualifying first-time buyers can still find full bonds. The buyer’s market is well supported by the favourable lending conditions, and flat price, and there is loads of good stock on the market.”