Brace for much higher interest rates on loans, mortgages
SOUTH African consumers could end 2022 paying almost double in interest on their loans and mortgages than they did at the end of last year.
This scenario comes as the SA Reserve Bank (SARB) looks set to foster monetary policy tightening this coming week on the back of runaway inflation.
Headline consumer price inflation in June, the numbers of which are due to be released on Wednesday, could accelerate further than to 6.5 percent recorded in May.
Inflation has surged to a five-year high, breaking through the upper limit of the SARB’S target range of 3 to 6 percent, largely due to record-high fuel prices and, to a lesser extent, higher food prices.
The war between Russia and Ukraine has aggravated global supply chain disruptions and added to the shortage of crucial commodities such as wheat and crude oil.
Fuel prices in South Africa have risen more than 20percent since the beginning of the year, and at least 40percent from a year ago, with the price of petrol now close to R27 a litre.
Adding to the country’s current woes is a weakening currency to a neartwo-year low as the rand has breached the R17-mark to the dollar, meaning that the cost of imported goods will be more expensive.
Faced with such deteriorating economic conditions, analysts said this week that the SARB had no choice but to hike interest rates by another 50 basis points from 4.75 percent to 5.25 percent on Thursday.
And with a further two hikes still expected in the latter part of this year, 2022 could end with interest rates easily above 6 percent and a far cry from the 3.75 percent at the end of 2021.
Currently, the prime lending rate is already at an elevated 8.25 percent, and a 50 basis point rise would take the rate to 8.75percent, moving closer to 9 percent.
FNB economist Koketso Mano said that interest rates could still rise by a full 1percent in the remainder of the year, as inflation was showing no signs of peaking.
“We already anticipate the SARB to front-load interest rate hikes this year, which means a strong likelihood of no less than 50 basis points or 0.5 percent hikes at the remaining meetings this year,” Mano said.
The bank has revised upwards its forecast of headline inflation for this year to 5.9 percent from 5.8 percent.
The bank’s implied policy rate path of the Quarterly Projection Model, given the inflation forecast, indicates gradual normalisation through to 2024.
SARB Governor Lesetja Kganyago said in May that economic and financial conditions were expected to remain more volatile for the foreseeable future.
Analysts agreed that the SARB would likely hike rates by 50 basis
points in July, but the timing of the remaining rates hikes for 2022 was more uncertain.
Anchor Capital co-chief investment officer Nolan Wapenaar concurred that there were 100 basis points worth of rates hikes left over the remaining July, September and November meetings.
This would take the repo rate to 5.75 percent by the year-end.
However, Wapenaar said there was a limit as to how high rates could go.
He explained: “SARB has to be cognisant of the detrimental impact of a rates-hiking cycle that is too severe on South Africa’s already strained economy. However, we cannot discount the various inflationary upside risks at this point, which would lead to further front-loading of the interest rates cycle.
“Overall, it is a difficult balance to
achieve, and SARB will be walking a tightrope over the remainder of 2022.” Wapenaar said.
Central bank rates hikes, and the associated tightening of financial conditions, are a blunt tool to tame inflation, but they also impede job creation and curb consumer spending.
In the US, the markets are now pricing in the possibility of a supersized 100 basis point rates hike from the US Federal Reserve this month, taking rates to 2.5 to 2.75 percent.
The central bank is expected to ramp up its battle against their fourdecades-high inflation which stood at a decades-high 9.1 percent in June, and heightened recession risks.
Tighter global monetary policies in response to surging global inflation threaten to weaken global growth
and reduce demand from key trading partners. Nedbank economist Tachin Ramnath said these factors, coupled with the resurgence of Covid-19 cases in China and India, compel the SARB to aggressively hike rates higher than expected.
“Higher-than-expected inflation figures could persuade the SARB to hike interest rates quicker than initially expected, adding further upwards pressure on the cost of production,” Ramnath said.
“Consumer prices hit a five-year high in May, which could lead to higher and more frequent interest rate hikes – further straining household budgets,” Ramnath said.