Brace for more expensive credit
LIKELY TO WIDEN IN 2019
Delivering the monetary policy committee speech last week, SA Reserve Bank (Sarb) governor Lesetja Kganyago announced that the central bank would raise the repo rate by 25 basis points to 6.75%.
The decision was informed by the fact that inflation has been edging towards the upper 6% level. The market saw the decision as hawkish, but with the consumer price index (CPI) for October registering at 5.1% year-on-year, Sarb was bound to act at some point.
A more chilling prospect is presented by the widening differential between the CPI and the repo rate, which is bound to complicate the central bank’s policy actions if it persists.
“The difference between the repo rate and the CPI is known as the real interest rate,” says Montfort Mlachila of the International Monetary Fund. “If the real interest rate is rising, it will increase the funding cost for companies but it may also increase savings.”
This year, SA’s real interest rate eased from about 2.7% in the first quarter (Q1) to about 1.5% in Q3. But in the past two years, as the US Federal Reserve normalised, the Sarb embarked on a relatively accommodative stance.
The two inverse monetary actions have seen the variance between Sarb and Fed interest rates exacerbate pressure on the rand. Fed chair Jerome Powell is more dovish. He confirmed that rates were currently “just below neutral” – this coming barely two months after he said interest rates were “a long way from neutral”.
His tone sent the Dow Jones Industrial Average up over 600 points as equity markets took the comment as the Fed being aware of the risks of tightening too soon.
From South Africa’s perspective, the dovish tone signals a much-welcome respite as the widening between the Fed’s interest rates and Sarb’s repo only adds pressure to the rand. Sadly, imminent US interest rate hikes in 2019 will play a prominent role in South Africa’s CPI inflation-repo rate differential.
However, Investec’s Annabel Bishop cautions that: “South Africa is likely to see the difference between CPI inflation and its interest rates widen slightly next year, rising from 1.5% to 2% ...” One of the most palpable effects of a widening real interest rate is expensive credit. Growth in private sector credit extension is already feeling the pressure – dropping 5.8% year-on-year in October from 6.3% year-on-year in September 2017.
With third-quarter unemployment edging up to 27.5% and National Credit Regulator revealing the rejection rate of new credit applications climbed 1.6 percentage points to 50.1% in the second quarter, SA’s private sector could do with some cheaper money.