By Ina Opperman
Repo Rate: Repayment on R1M bond taken in 2021 increases by more than R2400/month
Electricity, food, fuel put consumers under more pressure.
Punch-drunk consumers are wondering when the current cycle of repo rate increases will stop after it was increased by another 25 basis points last week.
The South African Reserve Bank’s (SARB) monetary policy committee (MPC) increased the benchmark repo rate to 7.25% at it’s bimonthly meeting last week. It was the eighth consecutive increase since policy normalization started in November 2021.
When will the increases stop? Most consumers are finding it harder to afford everything they need on their salaries which hardly increased last year, while they have to pay more for food, fuel and electricity.
Neil Roets, CEO of Debt Rescue, says if you took out a bond for R1 million before the current cycle of increases started in November 2021 at the prime lending rates of 7%, you would have started off with monthly repayments of R7 869. Now that the prime rate is 10.75%, your repayment will be R10 283, which is R2 413 more.
If you got car financing for R200 000 before November 2021 on a 60-month term with no deposit and no residual at the prime rate of 7%, you would have started with monthly repayments of R4 030 and now you will pay R351 more at R4 381.
According to the PwC South Africa Economic Outlook report for January 2023, Sarb lifted interest rates by a cumulative 375 basis points since November 2021 as it normalized monetary policy after the big rate cuts in the first half of 2020 and attempted to manage local inflation expectations as price pressures escalated in 2022.
In the report, PwC says interest rates could start declining from the third quarter of the year, as Sarb bases its interest rate decisions on specially their inflation forecasts.
“The latest Sarb projections indicate the central expects inflation to be around the midpoint (4.5%) of the target range from the third quarter of 2023 and therefore we expect interest rates to start easing in the second half of this year.
“However, with continued upside risks to the inflation outlook, there will be limited scope for lowering interest rates this year and heading into 2024.”
Jacques Celliers, CEO of FNB, says there are indications that this rate-hiking cycle may be coming to an end.
“higher interest rates benefitted consumers who receive income from cash savings instruments. However, load shedding resulted in additional unplanned expenses for households and businesses that are striving to stay afloat.”
Mamello Matikinca-Ngwenya, chief economist at FNB, says Sarb lowered its pace since delivering 75 basis points increases between July and November 2022.
“We still believe that the MPC will reach the terminal of the current hiking cycle in the first quarter and that if another 75 basis points hike is delivered in March, there should be space to support the economy before year-end.”
Jeff Schultz, senior economist at BNP Paribus South Africa, says the Sarb kept the door wide open for more hikes if necessary.
“The governor made it clear that should inflation prove stickier than it currently projects (we think very likely), it would not hesitate to act and that the policymakers ‘mean business’ in ensuring inflation and inflation expectations re-anchor towards its preferred 4.5% target.”
He therefore maintains that the door remains wide open for another 25 basis points hike in March and potentially more down the line, depending on inflation and the rand. “Our expectation that CPI will end the year still one percentage point above the Sarb’s preferred target, alongside our view that inflation will sustainably return to 4.5% only by 2025, underpins our view that the central bank will not be able to begin a modest cutting cycle until May 2024. We maintain our end – 2024 repo rate forecast of 7.00%.”
Adriaan Pask, CIO at PSG Wealth, says PSG wealth sees a continued upward trend in global interest rates.
Arthur Kamp, chief economist at Sanlam Investments, points out that Sarb front loaded its interest rate hikes in this cycle.
“Also at 7.25% the repo rate is above the level of 7.08% projected by Sarb’s quarterly projection model (QPM) for year-end 2023. It is never easy to pinpoint the likely terminal interest rate during a hiking cycle and as Sarb notes, future interest rate decisions will be data dependent.”
However, there is an argument to be made that interest rates are very close to the peak, perhaps one more 25 basis points interest rate hike, before, at the least, a pause.
Frank Blackmore, lead economist at KPMG, says consumers should remember that the MPC targets inflation and as long as that inflation is outside the target, people can expect further increases of the repo rate, although these will probably be more in line with the 25 basis points of last week.
Carmen Nel, economist and macro strategist at Matric Fund Managers, says if inflation expectations in the BER’s first quarter survey shows a marked decline, there is a notable chance that this is the end of the hiking cycle.
“However, we think the numerous risks between now and the March meeting will ensure that a further 25 basis points hike remains on the cards that will take the peak in the policy rate to 7.50%.”