How many more interest rate hikes are on the cards?
Category Newsletter: Article
South Africans have to tighten their belts in the coming months to navigate Eskom, inflation, and the threat of sanctions.
But depending on the upcoming rate hike, it could determine whether that belt-tightening only requires you to take up a few notches or if you would have to shed another human (in weight) to get that tighter belt around your waist.
Monetary Policy Tightening Continues
In the last 19 months, South Africa has seen a series of strict monetary policy tightening. If this continues in July, South Africans will have to contend with the eleventh consecutive interest rate hike, which could have catastrophic consequences for the overstretched South African homeowner.
On 25 May 2023, the South African Reserve Bank's (SARB) Monetary Policy Committee made an unanimous decision to increase rates by 50 basis points, causing the repo rate to rise to 8.25% and pushing the prime lending rate to 11.75%.
All these consecutive hikes have caused the rate to reach its highest in 13 years, a notable milestone given the last time interest rates were this high, a global financial crisis was battering South Africa's economy and local currency.
Reserve Bank governor Lesetja Kganyago revealed that the decision to hike and increase interest rates by 50 basis points stemmed from an ongoing consumer price inflation and a sluggish economy, which has only been worsened by frequent power outages.
The current hiking cycle began on November 2021, increasing rates by 475 basis points from November 2021 to May 2023.
But where to next?
According to Kganyago, the bank had to raise its 2023 headline inflation forecast from 5.4% to 6%, prompted by increased inflation expectations over the past year.
The corrected forecast stems from the rising core goods pricing.
However, there may be some respite on the horizon as Kganyago shared that food and fuel inflation was expected to ease, with a headline forecast of 4.9% in 2024 and 4.5% for 2025.
With so much at stake, July's interest rate decision could be the most impactful.
25 Basis Points
Pundits and economists forecast a 25 basis rate increase in the upcoming Monetary Policy decision.
Market conditions haven't changed much in the last two months; therefore, there isn't a chance that interest rates will ease.
A 25 basis point increase is better than the alternative rate increase - 50 basis points.
25 Basis points allow homeowners to get used to a gradual increase in their repayments, making the consequences far less detrimental.
Should the SARB decide to increase the rates by 25 basis points, the interest rates are on track to reach the country's all-time high of 13.50% in May 2023.
50 Basis Points
May's 50 basis points interest rates created a tremendous aftershock, especially among potential buyers who got cold feet and chose to delay the purchase to avoid the higher interest rates.
A 50 basis point interest rate hike in July could be catastrophic for South African homeowners. It would push the prime lending rate over 12%, which would mean higher bond repayments and, possibly, car repayments.
If the SARB chooses to increase rates by 50 basis points, homeowners would have received the equivalent of a year's worth of interest rates in two short months.
Such a rate increase could push indebted homeowners over the edge, evident by new loan default rates reaching 19% (or 1 in 5 people).
Unchanged
Although a reduction is ideal, pundits aren't forecasting the SARB would leave the interest rate unchanged.
The Rand hasn't dipped below R18/$1 since April. There have also been 204 days of load shedding in the current cycle, with only two days in October 2022 and one day in March 2023 when Eskom truly suspended outages.
South Africa's relationship with Russia could also put further pressure on the local currency and economy, necessitating rapid rate increases.
That said if the SARB keeps rates unchanged South African homeowners can breathe a sigh of relief. Rather than having to worry about increased mortgage repayments, homeowners will only have to contend with inflation and other rising costs.
Reduction
Since South Africa doesn't use quantitative easing it's a matter of waiting for market conditions to improve and consumer confidence to improve alongside it. Neither seems within reach, given the current headwinds.
Therefore, while a reduction would be the best scenario for "house poor" South Africans, it's unlikely the Reserve Bank will reduce interest before 2024.
Nevertheless, if a reduction does occur, South African homeowners can loosen their belts slightly.
Conclusion
It's difficult to determine exactly how many interest rates could occur before the hiking cycle ends. Ideally, the interest rate will remain unchanged before an eventual reduction - a much-needed reprieve for homeowners.
However, if this isn't the case, the hiking cycle has displayed the importance of future-proofing your budget that considers the fluctuations that could mean less disposable income.
Author: Coastal Property Group
