Last week the repo rate for South Africa increased by 75 basis points to 5.5%.
The increase raises the prime lending rate to 9%. (The rate at which commercial institutions
give credit to customers) .
Have you ever drank too much after a long day at work?
If you have, you’ll know how the good effects (the confidence and euphoria) come first but
the bad effects come much later in the morning (the hangover ). Inflation works quite the
same way in economics.
Interest rates are lagging economic indicators because they are only visible after the initial
economic boom has occurred. So, whenever the central bank prints more money, the good
effects come first meaning there is easier credit available and state-sponsored programs are
undertaken more readily (like the Social Relief of Distress [SRD] R350 grant etc. or increase
in the old age pension scheme).
Logically the increasing purchasing capacity of consumers increases due to the injection into
the system which in turn increases inflation (the bad effects come later). The bonus is the
increase in interest rates in addition to the high inflation.
How will the latest interest rate hike affect you?
interest rates have increased by 2% during the current interest rate cycle, despite the small
25-bp increases in November 2017 and January 2018 not initially having a significant effect.
The cumulative effect of the rate increases of 2% thus far and probably another 1% will be
felt by consumers.
To give a practical example of the effects of this latest hike, a homeowner with a variable
interest rate mortgage to the value of R1,000,000 would’ve paid about R8,521 before the
hike will now pay about R8,997, representing an R500 increase in real terms.
Because of this, South African businesses that use debt to conduct business will have
greater operating costs, which are frequently passed on to the customer. Resulting in
increased consumer costs.
The rise in the price of fuel is a major factor in the growing inflation rates. Higher gasoline
prices not only result in higher vehicle operating expenses for consumers but also greater
prices for consumer goods due to higher logistical costs. South African consumers will
ultimately pay more for a basket of products as a result of rising inflation and interest rates.
The Ramaphosa Farm controversy, the electricity crisis, gasoline price hikes, and historically
low levels of business confidence; all of which call for immediate government involvement
have all exasperated the situation.
There are very few positive projections regarding the future as at least two more rate hikes
are expected before year-end thus it’s going to be a very long and bumpy road until at least