SA consumers vulnerable to interest rate hike
Momentum Asset Management believes that a rate hike could make South African consumers more vulnerable than they already are.
“In our view, a weak domestic growth outlook is unlikely to delay interest rate normalisation in South Africa,” said Sanisha Packirisamy, an economist at Momentum Asset Management.
According to Packirisamy, monetary policy tightening (an interest rate hike) remains necessary, with Momentum expecting a “modest pace in rate tightening in light of a weak growth outlook.”
Momentum expects an interest rate increase of 0.25% (25 basis points) for the third quarter of 2015, with an additional one percent (100 basis points) increase spread across 2016.
According to a survey conducted by the Bureau for Economic Research, market experts believe that CPI (consumer price index) inflation will increase to 5.6% in 2015, while they expect it to increase to 6.1% in 2016.
According to the South African Reserve Bank (SARB), the current CPI is 4.6%, while the current interest rate 5.75%.
The outlook for consumers
“With the bulk of the weaker oil price windfall having reversed, the South African consumer is facing an increasingly challenging environment,” noted Momentum.
Packirisamy added: “Rising food inflation could further erode real disposable income levels for lower-income households, where food accounts for a larger portion of their monthly spend.”
Saving money also appears to be a challenge for some South Africans. According to data released by SARB, South Africans do not have adequate savings, with the net household savings-to-GDP ratio dropping to -1% since the global financial crisis in 2008.
Packirisamy revealed that this lack of saving will be negatively impacted by a rate hike. “In the absence of a significant savings cushion, further interest rate increases would leave South African consumers in a more vulnerable position as gains in disposable income are further eroded,” said Packirisamy.
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