Consumers must remember not to buy on credit when they spend money on Black Friday, seeing that the Monetary Policy Committee of the SA Reserve Bank increased the repo rate by 75 basis points today. This means the more you borrow, the more interest you will pay.
This warning comes from independent economist prof. Bonke Dumisa. He expected the increase to be 75 basis points, but after hearing that the inflation increased again after it was considered that it peaked in July, he was wondering if the repo rate could be raised by 100 basis points.
This was the sixth consecutive bimonthly increase in the repo rate, which stands at 7% after today’s increase. Three committee members voted for a 75 basis points increase, while two voted for 50 basis points. In the September meeting, two members would have preferred a rather aggressive 100 basis points increase.
Ethel Nyembe, head of card and payments at the Standard Bank Group, echoes Dumisa’s sentiment, saying that it is important not to get carried away in the moment and buy beyond your means.
“We are currently in an upward interest rate environment, with rates adjusted upwards again today, which means the cost of servicing debt will increase.”
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Ongoing interest in Black Friday, but repo rate will matter
She says the bank expects ongoing consumer interest in Black Friday, but the volume of transactions may be impacted by the recent rate increase, savvy consumers, rising consumer costs and a growing trend of extended Black Friday specials over the period of a week and a month.
Prof. Jannie Rossouw, visiting professor at the Wits Business School, on the other hand expected 50 basis points. He also ascribes the higher increase to the higher inflation rate and warns that inflation will probably stay higher for longer and consumers must plan for this.
“We have to accept that inflation is an international problem currently, but we can be glad that the Sarb did not wait as long as the central banks in developed countries such as the US and UK, who thought that inflation would not stay high for so long.”
He adds that it is not only bad news: if you have savings, you will earn more interest now.
Carmen Nel, chief economist at Matrix Fund Managers, says as the market’s pricing was split between a 50 and 75 basis points before the meeting, the reaction from the rand and rates was minimal following the announcement, although the rand was trading slightly weak relative to the level on the US Dollar Index (DXY).
“At 7.00%, the repo rate is in line with the steady state in nominal terms, but with inflation running well above target, the real policy rate is deemed accommodative. The MPC views the current monetary policy stance as being supportive of the economy and credit growth.”
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Avoiding a return to stagflationary conditions
Jeff Schultz, senior economist at BNP Paribas South Africa, says the increase was in line with the company’s forecast.
“We would caution on not reading too much into the ‘close call’ nature of this week’s decision. The statement was unequivocally hawkish in our view.”
He says Sarb governor, Lesetja Kganyago’s comments in the press conference after the decision were perhaps the most telling of a central bank that is steadfast in its goal to avoid a return to stagflationary conditions.
“The governor made it clear that the central bank would rather run the risk of overtightening and getting inflation under control than letting inflation run hot for longer and ultimately hurt growth more long-term. Interestingly, Kganyago made the point we have recently argued, that South Africa’s very low potential growth means it will not take much growth to close the output gap next year and this could place further upside risk to the inflation outlook.”
Schultz says while the ‘close call’ nature of the decision to raise rates does open the door for a 50 basis points hike in January, this will come down to “data dependence” from now until then – further upside inflation surprises, a weaker rand (Sarb now has a USDZAR starting point of 17.76 versus its third quarter starting point of 16.91) and tighter global financial conditions could easily challenge our current (already above consensus) forecast for a terminal rate of 7.50%.
“We keep our call for a final 50 basis points hike in January but maintain that there are upside risks to our terminal rate assumption beyond January next year, even if the central bank is indeed in a position to downshift to 50 basis points on 26 January amid an ever-weakening growth backdrop.”
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