The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the key monetary policy interest rate – the repurchase, or repo rate – by 50 basis points from 6,25% to 6,75% per annum. In view of this hike in the repo rate, Absa announced that its prime lending and variable mortgage interest rates will rise from 9,75% to 10,25% per annum, effective from 29 January 2016. Lending rates have risen by a cumulative 175 basis points since the start of 2014.
The latest hike in the repo rate was largely the result of the prospect of increasing inflationary pressures against the background of trends in and the outlook for some key driving factors, such as the rand exchange rate, food prices, electricity tariffs and property rates and taxes. The rand exchange rate has depreciated sharply against the major international currencies towards the end of last year and remained relatively weak in the early stages of 2016.
Food price inflation is expected to show a significant upward trend in the near term in view of the severe drought conditions in large parts of the country during last year, while electricity tariffs may increase at a rate of well above inflation. However, low international oil prices may help to contain domestic fuel prices and the upward pressure on headline inflation.
Interest rates in the US were hiked late last year and if the Federal Reserve is to raise rates further, emerging market and developing country capital flows and exchange rates may experience some further strain, which may in turn impact inflation, interest rates and economic growth in these countries, including South Africa.
The Reserve Bank’s forecast for domestic headline consumer price inflation is 6,8% in 2016 and 7% in 2017. Core inflation is projected at 6% in 2016 and 5,9% in 2017. Growth in real gross domestic product (GDP) is estimated by the Reserve Bank to have been 1,3% in 2015, with growth forecast at 0,9% in 2016 and 1,6% in 2017.
Against the background of the abovementioned trends and expectations, the outlook is for domestic interest rates to rise further during the course of 2016 in an attempt to curb inflationary pressures. Higher interest rates will lead to an increase in debt repayments and debt-service costs, which will affect household and business sector finances, consumer and business confidence, the demand for and affordability of credit, consumption expenditure, fixed investment and eventually economic growth.