The South African Reserve Bank’s decision last week to keep interest rates as they are has prompted experts to suggest the interest-rate/inflation cycle has turned and consumers could expect a raising of rates by the end of the year.
The members of the bank’s Monetary Policy Committee were unanimous in their decision to keep the repo rate at 6.5% and the prime lending rate at 10%.
This follows signs inflation is picking up, although it is expected to remain comfortably within the SARB’s target 3-6% range.
Maura Feddersen, economist at financial services firm PwC, says last month’s inflation results confirmed projections that inflation had reached a turning point in March. Following from a multi-year low of 3.8% year-on-year in March, inflation ticked up to 4.5% last month. She says the reserve bank expects inflation to peak at around 5.5% in the first quarter of 2019, from an expected 2018 average value of 4.9%.
Feddersen says SARB Governor Lesetja Kganyago noted that inflationary pressure came from a slight weakening in the rand exchange rate (5% against the US dollar over the past two months) and increasing Brent crude oil prices, which recently broke through the psychological ceiling of $80 per barrel.
Furthermore, the impact of various indirect taxes, including the increase in VAT and the levy on sugar-sweetened beverages, have started to manifest in higher inflation readings.
Chief executive of FNB Consumer, Dr Christoph Nieuwoudt, says the economic pendulum has shifted significantly since the previous rate cut and consumers’ disposable income has come under significant pressure due to the substantial rise in fuel prices and a relatively unstable rand. “With further hikes in fuel prices in the next few weeks, it’s critical for consumers to be a lot more responsible about their finances,” he says.
Luigi Marinus, portfolio manager at PPS Investments, also fears its the end of the short rate-cutting cycle. He says: “Inflation has been kept low, in part by significant rand strength and due to the low oil price. But with the oil price closer to $80 per barrel, it can no longer be considered relatively cheap.
“Another consideration is the global backdrop. With the US in a rate-hiking cycle with a view to continue hiking this year, moving against this trend could prove difficult, especially for emerging market economies.”