SA Reserve Bank takes its foot ‘slightly off the gas pedal’ to help anchor inflation

Speaking at a media webinar, the head of economic research at the Sarb, Chris Loewald, said the interest rate increase was “not so much hitting the brakes as taking our foot slightly off the gas pedal”.  

Sarb governor Lesetja Kganyago said the Monetary Policy Committee (MPC) believes a gradual rise in the repo rate will be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates. 

However, he cautioned that economic and financial conditions are expected to remain more volatile for the foreseeable future. 

“In this uncertain environment… the MPC will seek to look through temporary price shocks and focus on potential second-round effects,” he said.  

Unpacking the MPC decision, Kganyago said there was “no doubt that Covid-19 led to significant shocks in supply chains both globally and domestically. As these supply chains recover, they remain constrained… leading to rising prices.” 

For the year ahead, the MPC anticipates that global growth will be slower as the rebound from the pandemic fades.  

Sarb’s forecast for global growth in 2021 sits at 6.2% (down from 6.3%), and is unchanged for 2022 and 2023, at 4.4% and 3.3%, respectively. GDP growth is forecast to be 1.8% in 2023 and 2.0% in 2024. 

“While important commodity export prices such as for coal, iron ore, platinum and rhodium generally decreased in the latter half of 2021, in recent weeks some prices and export values have been more buoyant.

“As a result, the current account surplus of the past year is expected to decline at a slower pace than expected at the November MPC meeting,” Kganyago said. 

Global factors

Commenting on the rate increase, Izak Odendaal, Investment Strategist at Old Mutual Wealth, said the increase was not unexpected and the hawkish message from the Fed on Wednesday night “sealed the deal”. 

“The reason for hiking [interest rates] is more about the global factors than local factors. Locally, we do have inflationary pressures from rising food, fuel and electricity costs. However, the decision is not so much to slow inflation as it is about global markets,” he said. 

For 2023 and 2024, petrol price inflation is expected to be -0.1% and 1.7%, respectively. Estimates for oil prices have been revised upwards and are expected to average $75 per barrel in 2022 and $72 per barrel in 2023, while fuel price inflation is up from 4.6% to 13.7%. 

Local electricity price inflation for 2021 was 10.2%, while the forecast for 2022 is revised up to 14.5% (from 14.4%) and remains at 12.4% in 2023. 

Core inflation was 3.1% in 2021 and is forecast to rise to 3.8% in 2022 (up from 3.7%). 

Reza Hendrickse, portfolio manager at PPS Investments, points out that inflationary pressures are also evident in the Producer Price Index, recording a 10-year-high annual change moving to 10.8%. This is still partly distorted by the supply chain impact of Covid, but also reflects high metals and petroleum-related products.

“South Africa cannot be the only country not hiking rates in this environment. In the Reserve Bank’s mind, we could come under speculative attack, or see major capital outflows with the rand then falling, putting pressure on inflation. 

“It’s much more about positioning SA in a global context than trying to influence what’s happening on the ground domestically,” Odendaal said. 

Economic recovery 

Jacques Celliers, chief executive of FNB, had a more optimistic take, viewing the decision as “a sign of recovery in underlying economic activity”. 

FNB Chief Economist Mamello Matikinca-Ngwenya said recent inflation outcomes and inflationary risks on the horizon justify a gradual hiking cycle that should ensure persistently anchored inflation expectations around the bank’s preferred 4.5% midpoint, while concurrently not choking the ongoing fragile, cyclical economic recovery. 

Looking ahead, she said that in this hiking cycle, FNB expects the Reserve Bank to proceed with caution amid the significant slack in the labour market. 

“We are pencilling in two more 25bps hikes in the first half of this year, which would put the repo rate at 4.50% by the end of 2022,” she said. 

Speaking from a property industry perspective, Dr Andrew Golding, chief executive of the Pam Golding Property group, said he had hoped there would be a pause in the upward cycle trend. 

“However, the interest rate will hopefully increase slowly and over an extended period of time,” he said. 

According to bond originator, ooba (formerly MortgageSA), first-time buyers applying for home loans in December were, on average, granted favourable interest rates on their loans at 0.2% below prime. 

Golding notes that this is the lowest rate since mid-2010, as banks continue to compete for market share. Repeat buyers fared even better, with an average interest rate of 0.4% below prime. 

Ooba stats further show that while 100% bond applications have stabilised, the approval rate continues to rise, reaching 83.7% in December, approaching the pre-Covid high of 85% in February 2020.

Debt increasingly expensive 

Consensus is that this is the bottom of a rate hiking cycle, which implies that now is a good time for consumers to re-evaluate their debt. 

Ayanda Ndmande, Strategic Business Development Manager: Retail Credit at Sanlam, says South Africans’ debt situation is getting worse, with the average debt-to-income ratio at an all-time high. 

The Debt Index from DebtBusters for Q3 of 2021 shows that the average debt-to-net-income ratio now stands at 116% across all income bands, and 145% for those taking home more than R20,000. 

Ndimande said many consumers are also financially responsible for their extended family, and their income is insufficient to cover their needs and those of their dependents. She advises consumers to speak to their creditors immediately if they are unable to repay debts, as ignoring the debt will only result in increased fees, interest and a negative impact on credit records. 

“Consider ways to pay off the smallest debts first to free up income to pay off the next smallest debts, and so on. This creates a virtuous snowball effect,” she says. BM/DM