Brace for more expensive credit

REAL INTEREST RATE: LIKELY TO WIDEN IN 2019

Growth in private sector credit extension is already feeling the pressure.

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.

Dovish in the US

Fed chair Jerome Powell is more dovish. He confirmed that rates were currently “just below neutral”

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 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% ...”

Private sector credit

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.