South African Reserve Bank Governor Lesetja Kganyago on Thursday announced a 50 basis point hike in the repo rate – lifting it to 6.75% – off the back of mounting concerns over runaway inflation.
“The rand has depreciated considerably in response to domestic and external developments, while the impact of the worsening drought on food prices is becoming increasingly evident,” Kganyago said.
He said the global backdrop had also become more challenging, particularly for emerging markets, as downside risks to the sustainability of recovery in the advanced economies had increased.
Three members of the Monetary Policy Committee (MPC) voted for a 50 basis point increase, two members voted for a 25bps hike and one voted that the repo rate remain the same.
The US Federal Reserve this week elected to keep its benchmark interest rate unchanged after a December 16 lift-off to 0.25%. The Federal Open Market Committee (FOMC) said that information received since its December meeting suggested that while labour market conditions had improved, economic growth slowed late last year.
Although the inflation rate – as measured by the consumer price index (CPI) – measured 5.2% in December, the Sarb expects inflation to average 6.8% in 2016 and 7% in 2017, showing a “marked deterioration” in the inflation forecast, Kganyago said.
“Food prices remain a significant risk to the inflation outlook,” Kganyago said. The Sarb expects food price inflation to peak at around 11% in the fourth quarter of this year.
A peak of 7.8% CPI is expected in the final quarter of 2016 and the first quarter of 2017, followed by a moderation to 6.2% in the final quarter of next year (5.7% previously).
“The changes in the forecast are mainly due to a significantly more depreciated real exchange rate assumption, and higher expected food price inflation. These upward revisions more than offset the impact of the lower international oil price assumption,” Kganyago said.
Rand weakness indicates that petrol prices may rise by 7c a litre next month, Kganyago said, while electricity prices could also increase.
Inflation will remain outside the Sarb’s 3-6% target range for the entire forecast period, he said.
Kganyago spoke at length about the worsening global growth outlook, including increasing risks of a slowdown in the US and the slowing Chinese economy. While this has hit all emerging market currencies hard, Kganyago said that the rand’s depreciation has been “in excess of its emerging market peers”.
“The risks to the growth outlook are assessed to be on the downside, despite the downward revision to the forecast,” Kganyago said.
The Sarb has revised its growth outlook downwards for 2016 to 0.9%, accelerating to 1.6% in 2017. It expects growth to have averaged 1.3% in 2015.
“The current account adjustment remains slow, with the deficit expected to widen further in the face of continued weakness in commodity prices and higher drought-induced agricultural imports,” he said.
“The financing of the deficit will also be more challenging in an environment of persistent capital outflows from emerging markets. Since the previous meeting, non-residents have been net sellers of South African bonds and equities,” Kganyago added.
He voiced concerns over the sustainability of the relatively low pass-through of inflation due to a weak exchange rate, which has to some extent acted as a buffer to this point.
“As noted on a number of occasions in the past, the MPC is of the view that the growth constraints facing the economy are primarily of a structural nature and cannot be solved by monetary policy,” Kganyago said.
Ian Wason, CEO of DebtBusters, SA’s largest debt counsellor, said “This does not bode well for South African consumers, as the Sarb’s decision to increase interest rates means that they will be paying even more toward their debt. Consumers were already struggling with their debt before this announcement. An increase in their loan repayments now is the “debt-end” we have been warning consumers about. There is no more wiggle room left for South Africans that live on credit.”
According to the latest Consumer Bureau Monitor Report (CBM) released by the NCR, nearly 54% of South Africa’s credit active consumers are experiencing or have experienced financial problems with their accounts.
“The cost of living is increasing and credit providers are tightening their lending belts. Consumers that have been living off credit are becoming more and more dependent on expensive unsecured ‘pay day’ type loans to keep their families afloat. These people are caught in a debt trap.”