The Reserve Bank’s decision to hike interest rates to their highest level since 2009 when the country was battling the fallout of the global financial crisis following the near collapse of the financial system, has stunned both economists and consumers alike, with Cosatu decrying the move as likely to worsen the unemployment scenario, and economists suggesting that consumers will be hardest hit, and disastrous for job growth.
South African Reserve Bank governor Lesetja Kganyago this week raised the bank’s benchmark repo rate by 50 basis points (BPS) to 7.75% – the 9th consecutive rate hike since policy normalisation started in November 2021, bringing borrowing costs to the highest since May 2009.
The markets had largely priced in an increase of 25 BPS, but a hawkish central bank felt the dim outlook for inflation narrowed its options for a smaller increase.
“Domestic food price inflation surprised higher again in February, and risks of drier weather conditions have increased. Load shedding may additionally have broader price effects on the cost of doing business and the cost of living in particular, as diesel consumption increases. Given sticky petrol and higher food price inflation, considerable risk still attaches to the forecast for average salaries,” Kganyago said.
“South Africa’s risk premium is sharply higher and will likely remain elevated over the forecast period. Given load shedding, upside inflation risks, and larger external financing needs, further currency weakness appears likely.”
South Africa’s annual inflation rate edged up to 7% in February from 6.9% in the previous month, still above the upper limit of the South African Reserve Bank’s target range of 3%-6%
Kganyago said guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future.
“Achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains would enhance the effectiveness of monetary policy and its transmission to the broader economy.”
Cosatu spokesperson Sizwe Pamla said the increasing interest rates will have a negative impact on small business development and worsen unemployment.
“The latest rounds of rate hikes are a testament that the federal reserve has become a monetary superpower that dictates global monetary conditions to emerging economies like South Africa, which have a limited mandate of price stability,” Pamla said.
“The federation appreciates that price stability is important. Higher inflation rates become an impediment for industries in productive sectors as inflation becomes a huge driver of costs.
However, price stability through inflation targeting cannot be the sole focus of the South African Reserve Bank, especially for a country with such high levels of structural unemployment and underemployment.”
Lullu Krugel, PwC South Africa’s chief economist, said the high cost of living had weighed on consumer confidence.
“Given the weak outlook for job growth in 2023-2024, the rising cost of living, elevated interest rates, and the decline in buying power over the past year, it is not unexpected that South African consumers are downbeat about their personal financial outlook,” Krugel said.
“Results from our survey show that three out of four South African respondents are either very or extremely concerned with their personal financial situation. The dire financial outlook once again heightens our concern about rising social risk.”
High interest rates present both opportunities and risks to banks but tend to offer more opportunities than risks.
The country’s biggest banks such as FirstRand, Absa, Nedbank, and Standard Bank all reported record profits for the financial year on the bank of a surge in net-interest income, the difference between revenues generated by interest-bearing assets and the cost of servicing liabilities.
The surge in profits also saw the banks declare record profits to the tune of billions of rands.
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