You could have been forgiven for thinking that we have reached the peak of the interest rate hiking cycle when the South African Reserve Bank announced a 25bps (0.25%) increase on the 26th of January 2023, to take the Repurchase Rate to 7.25% and the Prime Lending Rate to 10.75%.
The annual inflation rate at the time – published on the 18th of January 2023 – had just declined by 20bps from a rate of 7.4% and the average annual inflation for the full year 2022 was 6.9%, far higher than the 4.5% for 2021. Against market forecasts, which had expected a 50bps increase, Governor Kganyago indicated that the inflation “monster” was expected to be subdued for the coming months amidst a depressed economy and delivered a quarter of a percent increase. It was almost as if this was a pre-cursor for Monetary Policy Committee (MPC) meetings to come; market commentators certainly took it as a harbinger for the foreseeable future. Prominent portfolio manager at First National Bank Wayne McCurry said on The Money Show with Bruce Whitfield: “Bruce I think inflation is really going to surprise us on the downside this year, I think we will see a sharp decline that will moderate these interest rates….”
Amidst all the conflicting reactions and analysis, one thing remained constant: the deepening power crisis. Almost all the company updates released for the previous two quarters had mentioned the impact that load shedding had on operations, on working capital, on storage capacity, output, etc. The escalating stages of load shedding over the past few months had seen the cost of basic food items elevated to levels not seen before. Retailers such as Shoprite have indicated they have spent more than R500 million in just 26 weeks to deal with the power crisis, staring at a R1 billion bill by end of the financial year. Businesses have no choice but to pass on the cost to an already “battered and bruised” consumer. But the worst is yet to come….
The latest annual inflation data shows that inflation is going back the wrong direction. From 6.9% in January, it increased by 10bps to 7%, with monthly inflation rising 0.7%, which should be a big concern for the Reserve Bank. Food and non-alcoholic beverages inflation now sits at 13.6% year-on-year, up by 20bps. Core inflation as well – which is a more reliable measure of the inflation in the economy – also rose to 5.2%, from 4.9% in January. Factoring in current developments internationally and the concern around the global financial system resulting from the fall of Silicon Valley Bank, Signature Bank and the pending takeover of Credit Suisse’, even our most serene prayers might not be enough to deflect another interest rate hike. In fact, it would seem rather reckless of the MPC to cut the rates or keep them unchanged.
The inflation fight must continue. The only heavy tool we have in our arsenal is the interest rate. Sentiments around the stifling of businesses, with some drawing reference to the collapse of Silicon Valley Bank, are debatable. One could argue that the bank collapsed because of a fatal business model and not the high interest rate in the United States. If anything, generally, banks are supposed to be beneficiaries of these hikes. The MPC must continue to fight the long fight, or sacrifice price stability in our country.