The economy will remain resilient
INTEREST RATE FEARS HAVE flared up again as the outlook for inflation has worsened. But most economists say the economy will take another 50 basis point hike in the repo rate in its stride – if it happens at all.
Bureau for Economic Research (BER) economist Pieter Laubscher says the BER had built an increase in interest rates in February into its growth forecasts for this year. That didn’t happen, as Reserve Bank Governor Tito Mboweni kept the repo rate unchanged at 9%. So, even if there’s another hike in the repo rate, the BER’s economic growth forecasts will remain unchanged, at 4,6% for the year.
“A hike in interest rates would be a good thing, as it would cool down the demand side of the economy. This, in turn, would prevent the current account deficit from widening. The effect would be better balance in the economy, with little negative effect,” Laubscher says.
He says the BER’s surveys among sectors of the economy such as retail suggest that there isn’t much of a slowdown yet in the economy. But there seems to be some disagreement among economists about the extent of the slowdown already taking place.
Standard Bank economist Goolam Ballim says evidence that a slowdown is gaining momentum is clear from a leverage point of view. If one dissects the credit growth figures, it becomes clear that household demand for mortgages is slowing. Standard Bank has also picked up a slowdown in the rate of new applications for mortgages. Ballim says this is an important indicator, as households use mortgage credit to finance consumer spending. Further evidence comes from motor vehicle sales.
Ballim says if interest rates are hiked, it will take place in an environment of reduced discretionary income for households. The high fuel price, among others, will reduce the money that consumers have in their wallets. An interest rate hike, together with reduced household incomes, could shave up to 0,3 percentage points off the economic growth rate for the year.
Absa Capital macroeconomic strategist Monale Ratsoma says last year’s hikes in interest rates are filtering through slowly. But one should bear in mind that interest rates work with a lag, and their effects will become more pronounced.
He points out that the National Credit Act, which will regulate the way banks grant credit, is likely to put a damper on credit growth when it comes into effect later this year.
Ratsoma believes the Reserve Bank shouldn’t and won’t raise interest rates. So does Ballim and Rand Merchant Bank’s Ettienne le Roux. Azar Jammine is in the camp that believes rates should rise, but he says they may not, given that Government seems intent on keeping the rand relatively weak.