Why our repo rate should come down
THE DAY after South African Reserve Bank governor Lesetja Kganyago announced the repo rate would remain at 7 percent – and by implication the prime lending rate at 10.25 percent – another commentary press release landed in my inbox.
This was on top of the ones that, clearly, were pre-written as they landed within minutes of the governor opening the floor.
This release, however, stayed in my head because the subject line indicated that the Monetary Policy Committee’s decision to hold rates provided some relief to consumers after the festive season.
As we all know, the festive season and back-to-school periods are generally not easy on the pockets. However, if what retailers were telling journalists after the festive frenzy is anything to go by, this holiday season was anything but merry for them, as it seems most consumers seriously cut back on spending. And that’s a trend I anticipate will continue for quite some time.
People are simply not shelling out on fancy dinners and gifts; they’re downsizing, purging debt, and cutting out whatever they can. This is hardly surprising.
Economist George Glynnis tweeted, quite some years ago, that the inflation people feel in their pockets is likely double the official rate.
Officially, the consumer price index is at 6.8 percent. I can certainly see what Glynnis meant every month when I go grocery shopping. And I’m sure that BankservAfrica’s latest figures on average salary increases will show that – in reality – many people are left with much less than what they had last year, when you factor medical aid and other items such as food and petrol into the basket.
According to the National Credit Regulator’s latest figures – admittedly from the second quarter of last year, but that’s what we have to work with – as many as 9.67 million people have impaired credit records. And that’s out of the then 24 million credit active consumers. That’s more than a third of credit active consumers who have a black mark against their name.
Inflation is a big driver of this, because each month’s basket costs more, and we unpack less. The good news is that, for now anyway, we may be nearing the end of the rating hike cycle. However, Kganyago did warn that, if second-round effects emerge that undermine the long-term inflation outlook, this view might be reassessed.
The Reserve Bank’s inflation forecast has deteriorated since its last meeting, and inflation is now only expected to return to the targeted 3 to 6 percent range in the final quarter of this year. It’s also expected to peak at 6.6 percent. That’s 13.2 percent effectively for you and me.
So, I disagree with the decision being a relief for consumers. Some, like me, may have expressed a sigh of relief, but it’s not relief in the true sense of the word. That will only happen when rates come down, and when consumers and businesses alike start putting money into the economy. Yes, that may have the unintended consequence of initially pushing prices up thanks to the economic principle of supply and demand. However, it will also boost economic growth, which equals jobs.
I think the Reserve Bank should take a contrarian view and drop rates.
As always, your views are welcome.