The South African Reserve Bank (SARB) will announce its interest rate decision on Thursday 24th November and it’s likely to be a continuation of the recent trend, says Citadel’s Chief Economist Maarten Ackerman.
He expects another hike by 75 basis points, taking the repo rate to 7%. This will be the seventh consecutive hike since the start of tightening in November 2021.
Ackerman says the SARB will continue hiking interest rates to mirror what is happening in the rest of the world, particularly looking to the Federal Reserve’s (Fed) actions in the current environment. “Although South Africa’s inflation is not as high as the United States (US), we are nearing peak inflation,” he says.
CONSUMERS UNDER FURTHER PRESSURE – BUT FOR HOW LONG?
The effect on the South African economy is unfortunate. As mentioned, the demand-side is already weak and our consumers are under pressure for various reasons like high interest rates, high unemployment, high debt levels, and the increasing cost of living.
“Typically, a rate hike now will only impact the real economy in six to nine months’ time which paints a difficult picture for consumers mid-2023. Since the SARB is almost a mirror image of the Fed, which is likely to keep hiking into next year before slowing down, as they get more confident that inflation is slowing, one can assume that as South African inflation drops below the upper target early in 2023, the SARB will also start to slow the speed of hiking rates.
Ackerman believes things may begin to stabilise to the target range 0f below 6% in the first half of 2023, which will allow the SARB to start slowing or even pause the pace of hiking for a while.
COMPOUNDING PRESSURE
To demonstrate how aggressive the hikes over the past year have been in real terms, let’s use property as an example. If you fully bonded a new home for R3-million to pay over 20 years:
- in November 2021, when the interest rate was 7.25%, you would expect to pay R23,711 per month;
- one year later, with the interest rate of 9.75% in November 2022, you would expect to pay R28,456 per month for the same house.
That’s an increase of approximately R5,000 from your monthly disposable income in under a year. Further rate hikes, which are expected down the line, will only increase this pain for consumers.