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Recently the SA Reserve Bank raised interest rates by 0.75% taking prime to 9.75%, back at pre-pandemic levels.

Consumers will feel the pinch, but the broader context is worth bearing in mind. SA monetary policy is in line with major economies globally that have all been hiking. European Central Bank (0.75% on 8 Sept), US Fed (0.75% yesterday) and Bank of England (0.5% today). So, SA is not alone. And we know we must keep inflation in hand, so worth having one eye on the bigger picture.

It’s realistic to expect a period where we will see lower transaction volumes and dipping house prices. We also anticipate a bit of segmentation in the market. This is between the lower end, which depends on housing finance, and the upper end, where housing equity and wealth play a more significant role.

In context, on a new home loan of R2 million, this hike will increase the monthly instalment by more than R970. Since November 2021, monthly payments on an R2 million home loan have increased by almost R3 400 due to the rate hikes.

The latest rate hike was in line with economists’ expectations. Moreover, it brings interest rates back to a level last seen in January 2020, before the Reserve Bank made steep cuts to bolster an economy in lockdown.

Governor of the SA Reserve Bank, Lesetja Kganyago, said. “While global producer price and food inflation have eased, Russia’s war in Ukraine continues, with adverse effects on global prices. Oil prices increased strongly from the start of the war to around US$130 per barrel. They may rise again from today’s level as stresses in energy markets intensify. Electricity and other administered prices continue to present clear medium-term risks.”

The rate hikes will heap more pain on a distressed South African economy. Still, the Reserve Bank is under pressure to keep up with jumbo interest rate hikes in other countries. Especially in the US, where rates were recently hiked by 75 basis points.

South Africa cannot afford to be left behind regarding rate hikes. Otherwise, the Rand and local assets like bonds will lose their appeal to foreign investors on the hunt for good returns. Foreign inflows are crucial to keep the Rand stable. A stable Rand is a key to inflation, as South Africa imports almost all its oil, priced in dollars. The Rand is currently taking a lot of strain as the dollar is bolstered by aggressive US rate hikes. It is now close to R18.30/$ after starting the year below R16.

The Reserve Bank also needs to signal clearly that it wants to tame inflation.

There is still one more monetary policy committee meeting left in November. After that, economists expect another rate hike – even though inflation may have peaked. In August, consumer inflation cooled slightly, to 7.6% from 7.8% in July, thanks primarily to lower fuel prices.

The economy is forecast to expand by 1.4% in 2023 and 1.7% in 2024, above previous projections. As a result, the bank’s headline inflation forecast for this year is unchanged at 6.5%. Still, it has lowered its inflation forecast for 2023 to 5.3% (down from 5.7%).

≈ ≈ Marsha

 

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