By Lehlohonolo Lehana.
This week is set to bring another interest rate hike making it harder for everyday South Africans to make ends meet as monthly repayments would increase in line with the rate hike.
The South African Reserve Bank (SARB) will hold its Monetary Policy Committee (MPC) meeting this week, with an announcement in interest rates expected on Thursday (25 May).
Markets have suffered multiple blows in the last few weeks amid intensified load shedding and geopolitical missteps, which have severely strained the economy. According to the Bureau for Economic Research (BER), as a result of this, the central bank is now more likely to push rates higher than previously expected.
In March, the MPC surprised the market when it hiked the rate by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%. At the time, analysts and economists anticipated an end the hike cycle, with only a few expecting one more hike of 25 basis points to follow in May.
However, given the current economic environment, the view has shifted, and it is now more likely to be another 50 basis point hike, the BER said. Worse still, there may be even more rate hikes to follow.
“Although a further worsening of the power situation is undoubtedly bad for growth and in isolation would argue against further domestic policy interest rate hikes, it is also inflationary,” the economists said.
“This is because longer hours without power will increase business operating costs as diesel-powered generators need to run for extended hours and wastage ramps up.”
The BER noted that retailers have already sounded the alarm that any additional costs associated with even more intense power cuts would have to be passed on to the end consumer.
“In that sense, increasingly, the power crisis is a stagflation – lower growth, higher inflation – shock.”
The economists said that the inflationary impact of load-shedding is exacerbated because concerns around the power crisis have arguably been a major contributing factor to the recent rand crash.
Markets have been in a “raw panic” over a possible collapse of South Africa’s grid, despite attempts from the government and power utility Eskom to assure that such an event is not likely.
The rand has also been beaten to the ground by allegations that South Africa sold arms to Russia. While these allegations – made by the US ambassador to South Africa – remain unproven, the government has launched an independent investigation into the matter.
Despite its contestations to the contrary, South Africa is widely seen as having taken Russia’s side over the latter’s invasion of Ukraine. The South African government insists it remains neutral – however, Western nations and business leaders are not convinced.
The BER said that, if sustained, the weaker currency will have adverse price impacts.
“Fortunately, in the very near term, the pass-through of the currency sell-off to domestic inflation is muted by subdued, albeit rising last week, international oil prices,” it said.
“Even so, given the SARB’s primary mandate of price stability, we think the upside price risks from more intense load-shedding, the recent stark deterioration in SA’s risk premium, and the associated fall in the value of the rand will push the SARB MPC to hike the repo rate by 50bps on Thursday,” it said.
Before the recent bout of currency weakness, the BER expected an increase of 25bps, signalling the end of the tightening cycle. However, the economists now say that the future of the hike cycle is more murky and indeterminate.
“Even if the MPC moves by 50bps on Thursday, it is now less clear whether that will bring the hikes to an end,” it said.