Repo rate increase’s domino effect will bring financial ruin to South Africans

The repo rate increase’s domino effect will bring financial ruin to the majority of South Africans while over 20 million of them already go to bed hungry every day.

It could not have come at a worse time either, with the war in Ukraine unleashing the biggest commodity shock the world has seen since 1973 and one of the worst disruptions to wheat supplies since the first world war.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) announced on Thursday that it increased the repo rate by 25 basis points and Neil Roets, CEO of Debt Rescue, says this increase is going to hit South Africans very hard.

“Higher oil and grain prices directly push up prices of key goods, such as fuel and bread and the compounded effect of these on food security may well pull the rug from under consumers’ feet. In addition, the domino effect it will have on the price of goods and services will cause many to look financial ruin in the eye.”

He warns that one of the most serious repercussions resulting from interest rate hikes as it inevitably drive up the price of basic food, is hunger.

In South Africa, almost 20 million people go to bed hungry each and every day, while 30 million run out of money every month, leaving them food vulnerable.””

Government must take urgent action right now to avoid the financial ruin of households across the country, Roets says.

Christo van der Rheede, executive director at AgriSA, agrees.

“Government must take responsibility and action to achieve the objectives of food security, which is about establishing an enabling environment that involves the affordability, accessibility, quality and safety of food, as well as sustainable natural resources and resilience of the environment.” 

Roets also says as it gets harder to meet living costs, people rely more on their credit cards and this only makes their situation worse as credit comes with steep interest rates.

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, pointed out that the Sarb noted that it sees household spending as the key contributor to economic activity given decent growth in disposable income, rising asset prices and increased credit demand.

“In our view, higher fuel prices could nevertheless erode purchasing power given the share of consumer spending on petroleum products and transport costs.”

Carmen Nel, economist and macro strategist at Matrix Fund Managers says although the repo rate increase was not a surprise, what was surprising was that two of the five MPC members voted for a 50 basis points and that a pause was not discussed, suggesting that a 50 basis point hike at one of the following meetings has become a distinct possibility.

“The debate is not whether the Sarb will pause in the coming meetings, but rather whether there will be enough reason to increase the repo rate by 50 basis points rather than 25. We think the rand remains a key factor because sharp rand weakness has historically been the trigger for larger increments.”

She says this time, accelerated Fed tightening, inflation breaching at 6.0%, and inflation expectations climbing further could culminate in a 50 basis points increase at the May or, more likely, the July MPC meeting.

“The anticipated second quarter breach of the 6.0% upper limit of the inflation target is largely due to the higher oil price. While some may criticise the committee for lagging the inflation dynamics, the Russia/Ukraine crisis and subsequent oil price surge have caught most forecasters by surprise.”

On a longer-term horizon, Nel says global growth is likely to moderate quite sharply due to the tightening in liquidity conditions brought about by the strong US dollar, Fed interest rate hikes and balance sheet reduction and the high oil price.

“South Africa will not be immune to a slump in global activity and liquidity. While this is very likely to put pressure on the rand, substantially weaker growth will give the Sarb pause for thought about extending the hiking cycle as aggressively as is currently priced by the market.”

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