Unchanged repo rate welcomed

Economists and banks have welcomed the decision to leave the repo rate unchanged at 8.25%, saying it provides a bit of stability and lifts consumers’ holiday spirits after a tough year.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) unanimously decided to keep the repo rate unchanged at 8.25% during its November meeting, despite headline inflation verging on the upper end of the Sarb’s target band.

Jee-A van der Linde, senior economist at Oxford Economics Africa, says the MPC’s unanimous vote to keep the repo rate unchanged suggests that the Sarb will only hike the repo rate if it absolutely must.

“Better monthly outcomes for core inflation played a deciding role in the latest decision and meant that the Sarb lowered its 2023 core inflation forecast to 4.8% in 2023, (previously 4.9%) and to 4.6% in 2024 (from 4.7%).”

Core inflation eased to 4.4% in October, which was less than Oxford Economics anticipated. However, Van der Linde says, the improvement was mainly due to favorable base effects as core price inflation accelerated towards the latter part of the second half of last year, while headline inflation moderated over the same period.

“We think it is unlikely that core price inflation will ease any further in November, with the risk of core prices pushing higher over the coming months considered more plausible. The governor emphasized that the MPC stands ready to act if upside risks materialized that would alter South Africa’s inflation trajectory, which (given the latest decision) implies that the Sarb might tolerate modest upside inflation surprises.”

In addition, Sarb’s inflation forecast strengthens the view that domestic monetary policy will remain tight, with the bank expected to start cutting rates in the fourth quarter of next year.

Annabel Bishop, chief economist at Investec, predicted that the repo rate would not be changed, says while the risk of another 25 basis points hike remains, with inflation accelerating to 5.9% in October, Investec expects headline inflation to drop to an average close to 4.6% in 2024, the period the Sarb is targeting now.

In September the MPC also left the repo rate unchanged at its highest level in more than a decade after a prolonged tightening cycle that began towards the end of 2021.

People can already not pay their bills on the current repo rate

Neil Roets, CEO of Debt Rescue, says with the relentless increases in food prices, a growing number of people are resorting to credit facilities to meet their monthly grocery bill requirements, which is a dangerous trend and definitely not a long-term solution.

“The string of increasing interest rate hikes earlier in the year led to steady and steep increases in loan installments and this has resulted in owners defaulting on vehicle and home repayments, with new data showing that South Africans are at a point where they are forced to give up their homes.

“Distressed house sales are on the rise in South Africa, as the majority of sellers are downgrading due to financial pressure,” he says.

This is in line with Lightstone’s latest property report that shows the number of homeowners selling their properties within two years of purchase has jumped from 2% of sales in May 2022 to 3.7% of sales in 2023.

Lightstone noted that this was due to higher living costs over the past two years, which put many homeowners in a debt trap after the interest rate relief provided during the COVID-19 pandemic.

Roets says this is but the tip of the iceberg, with recent financial data showing just how much the average South African is struggling to keep up with the cost of living in the country and that the average consumer now needs to spend around 63% of their take-home pay to service their debt.

“Data shows that consumers taking home R35 000 or more per month have the highest monthly debt repayment ratio, losing an unbelievable two-thirds (67%) of their income on debt repayments, with bond repayments now comprising 42% of the debt of consumers who earn over R35 000.

Nedbank’s latest NedFinHealth Monitor shows that 69% of South Africans cannot pay all their bills on time and 33% said they were unable to pay their home loans in the past 12 months.

Roets says therefore he is deeply concerned that we will likely see an even higher number of defaults in the months to come, including those on bank loans and credit facilities.

Unchanged repo rate provides relief after a challenging year

Jacques Celliers, CEO of FNB says while many factors indicated the possibility of a rate hike, the Sarb’s decision to hold its key lending rate provides some relief after a challenging year, although the decision aligns with traditionally high spending during Black Friday and the holiday season.

“I urge consumers to keep an eye on their financial needs in January next year as we go into this higher spending period.

“With inflation now stabilizing and even declining around the world, consumers and businesses should be aware that salary adjustments will follow a similar pattern. The prospect of lower rates in 2024 should not generate a strong reaction from borrowers.”.

Mamello Matikinca-Ngwenya, chief economist at FNB, says today’s decision was expected. “Global activity has weakened following the post-pandemic cyclical recovery and while inflation remains sticky, it is slowing. In line with this, central banks in major economies have also paused interest rate hiking cycles.

“Locally, lower fuel prices should support slower headline inflation before year-end, pushing real interest rates higher.

“More importantly, core inflation remains weak despite higher import and electricity costs, highlighting constrained consumer demand which has extended to property and vehicles.”

She says while funding risks remain elevated, the more positive market reaction to the Medium-Term Budget Policy Statement (MTBPS) and a subsequently improved rand-dollar exchange rate would have provided further cause for the MPC to stay put.

“That said, we are not surprised that, like the Fed, the MPC maintained a hawkish tone. Such a tone may be key in containing inflation expectations and financial conditions while the impact of an aggressive hiking cycle takes the intended toll on economic activity.”