CityPress - - Business - DE­WALD VAN RENS­BURG de­wald.vrens­burg@city­press.co.za

In­fla­tion will hit 7.8% by the end of 2016 and eco­nomic growth will come in at un­der 1% for the year. That’s the SA Re­serve Bank’s new fore­cast – and the pri­mary rea­son in­ter­est rates were hiked by 0.5 per­cent­age points this week by the bank’s Mon­e­tary Pol­icy Com­mit­tee (MPC). The move sur­prised enough peo­ple to trig­ger a rapid strength­en­ing of the rand, from R16.44 to R16.09 against the dol­lar, the best it has been since the first week of the year.

Re­serve Bank gov­er­nor Le­setja Kganyago’s speech on Thurs­day af­ter­noon em­pha­sised the im­pact of the ex­change rate and food in­fla­tion, caused by the drought rav­aging this year’s sta­ple food har­vests.

In­stead of av­er­age in­fla­tion of 6% – the bank’s pre­vi­ous pre­dic­tion, we were now fac­ing 6.8% in 2016, said Kganyago. The av­er­age last year was 4.6%. This year, in­fla­tion would peak to­wards the end of 2016 at 7.8%, went the fore­cast.

Th­ese are the high­est in­fla­tion rates since 2009, but still ex­clude any ad­di­tional elec­tric­ity-tar­iff hikes Eskom might con­vince the Na­tional En­ergy Reg­u­la­tor of SA to al­low this year.

The ex­pected in­fla­tion would be above the Re­serve Bank’s tar­get of be­tween 3% and 6% for the whole year, added Kganyago.

The high in­fla­tion will make it very hard for Trea­sury to even re­motely main­tain the value of the coun­try’s so­cial se­cu­rity net.

When in­fla­tion is driven by food in­fla­tion, the ten­dency is for the of­fi­cial head­line rate to un­der­state the ac­tual in­fla­tion ex­pe­ri­enced by poorer house­holds.

Al­ready in De­cem­ber the of­fi­cial in­fla­tion rate of 5.2% masked higher in­fla­tion of 5.7% for the poor­est 20% of con­sumers, ac­cord­ing to Stats SA.

The cen­tral bank has been ac­cused of blud­geon­ing South Africa with higher in­ter­est rates when the fac­tors di­rectly caus­ing in­fla­tion, namely a drought and the ex­change rate, are not re­ally af­fected by hikes.

Tech­ni­cally, the dis­tinc­tion is be­tween “de­mand-side shocks”, such as con­sump­tion ris­ing rapidly due to mas­sive spend­ing on credit, and “sup­ply-side shocks”, such as the sud­den spike in food prices due to crop fail­ure. Mem­bers of the MPC fielded ques­tions about it on Thurs­day. Rashad Cas­sim, head of the Re­serve Bank’s eco­nomic re­search and sta­tis­tics depart­ment, called it a “lux­ury” for a cen­tral bank to find it­self fight­ing de­mand-side in­fla­tion.

He de­fended the hike, claim­ing it did not amount to “re­spond­ing crudely” to the ef­fects of the drought and the rand.

The in­ter­est rate’s “crit­i­cal func­tion is to en­sure sup­ply shocks do not feed into se­cond-round ef­fects”, he told jour­nal­ists.

Hik­ing rates to bat­tle sup­ply-side shocks was not as ef­fec­tive, but “not use­less”, said Cas­sim.

Brian Kahn, Kganyago’s ad­viser, tried to pla­cate con­cerns about how the rate would hurt in­debted con­sumers.

Un­like dur­ing the pre­vi­ous pe­riod or ris­ing rates in 2006 to 2008, con­sumer debt was now more likely to be un­se­cured and sub­ject to a fixed in­ter­est rate, he said.

That meant the week’s hike should not in­crease the bur­den of pay­ing ex­ist­ing debt too much.

Mak­ing new debt more ex­pen­sive was, how­ever, more or less the whole point of the ex­er­cise. The ef­fect of the rate hike – and the rate hikes that would al­most cer­tainly fol­low it – would, how­ever, be tem­pered to some ex­tent by new reg­u­la­tions in­tro­duced last year by the depart­ment of trade and in­dus­try (the dti).

Th­ese are new max­i­mum le­gal in­ter­est rates us­ing a new for­mula for pass­ing the cen­tral bank’s repo rate through to con­sumers. In a nut­shell, the rule now is that a 1% in­crease in the repo raises the max­i­mum rate on credit cards and most loans by 1%. Pre­vi­ously, a 1% repo hike would have made most of the max­i­mum rates go up by 2.2%. This week’s hike raises the repo rate from 6.25% to 6.75%. That raises the bank’s bench­mark “prime” in­ter­est rate from 9.75% to 10.25%.

Un­der the new dti rules, the max­i­mum in­ter­est on a credit card goes from 19.75% to 20.25%.

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