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The South African Reserve Bank (SARB) has announced another interest rate hike, taking the repo rate up to 8.25%. This is the highest rate we've seen since way back in 2009.
What's behind the decision to hike rates again?
One key factor is the country's risk premium. This is a measure of how risky investors perceive South Africa to be relative to other geographies, and it's been going up recently due to the worsening electricity crisis, among other factors. As a result, the value of the rand has dropped by over 6% since May, and the yield on 10-year South African government bonds has risen to 12%.
These factors have contributed to the upward pressure on inflation, and the SARB has been compelled to respond as it seeks to contain inflationary pressures and maintain financial stability.
There are also global factors at play. Inflation has been stubbornly high in other countries too, which has led to higher interest rates in places like the US and Europe. This, in turn, has put pressure on South Africa to follow suit.
All of this means that the SARB is now taking a restrictive approach to monetary policy. The Bank has raised interest rates by a total of 475 basis points since November 2023, and this is starting to have an impact on consumer spending.
The inflation outlook is also worrying. Prices of essential goods like food and fuel are on the rise, and there are concerns about the impact of load shedding on the cost of living and doing business. As a result, the SARB has raised its inflation forecast for both 2023 and 2024.
So what does all this mean for interest rates going forward?
The situation is very fluid, and there are many factors at play. The SARB will be keeping a close eye on things like the electricity situation and the upcoming BRICS summit to decide whether further rate hikes are necessary.
One thing's for sure, though: if you're a South African consumer or business owner, it's going to be a challenging few months ahead.
The impact of the rate hike on consumers and businesses
Rising borrowing costs are making it more expensive for individuals to service existing debt and take out loans for major purchases, such as homes or cars. On the other hand, savers will benefit as bank deposit rates reprice higher. However, it is important for savers to compare rates, as not all banks and financial institutions will reprice their deposit rates equally.
For businesses, the increase in the cost of borrowing could lead to cutbacks in investment and possible layoffs as companies struggle to maintain profitability in the face of higher input costs.
There are also concerns about the impact of the rate hike on the property market. Higher interest rates could make it harder for people to get onto the property ladder and could also put pressure on those who already have mortgages.
The impact of global factors on South Africa
While the country risk premium is a significant factor behind the latest interest rate hike, there are also global factors at play. Inflation has been a challenge in many countries around the world, and this has led to higher interest rates in places like the US and Europe.
Higher rates in developed economies hold implications for foreign capital flows needed to fund countries such as South Africa, that has a deficit on the current account of the balance of payments. This, in turn, has put pressure on South Africa to follow suit.
The SARB has been trying to balance the need to keep inflation under control in a challenging economic backdrop. However, with inflationary pressures mounting, it appears that the SARB has decided to err on the side of caution.
The impact of load shedding
Another factor that's been putting pressure on the South African economy is load shedding, which has raised the costs of doing business and had a direct impact on the prise of goods and services as higher input costs are passed on to consumers. In addition, load shedding can put direct pressure on the cost of living as consumers turn to alternative sources of energy, such as solar panels, inverters, generators or gas stoves.
Load shedding has been a challenge in South Africa for many years, and it's been exacerbated in recent months due to a combination of factors, including maintenance issues and a lack of investment in the energy sector.
The SARB has acknowledged the impact of load shedding on the economy, and has factored it into its decision-making around interest rates.
The outlook for interest rates
Looking ahead, it's difficult to predict what will happen with interest rates in South Africa. One key consideration will be the electricity situation. If load shedding continues to intensify, this could put pressure on inflation and lead to further interest rate hikes.
Another factor will be the global economy. If inflation remains high in other countries, this could put pressure on South Africa to raise interest rates further to keep inflation under control and support the local currency. The BRICS summit in August is a further risk event on investors’ radars.
Implementing measures to urgently address South Africa’s issues could help restore confidence, catalysing the rand’s recovery and positively impacting the country risk premium and interest rates.