MPC hikes rates, borrowers to feel pain

Today saw the Monetary Policy Committee (MPC) hike the repurchase rates (repo rate) by 25 basis points (0.25%), to 6% per annum with effect from Friday 24 July. This means that the prime lending rate will jump to 9.5%.

Lesetja Kganyago, Governor of the South African Reserve Bank (SARB) said that the MPC has indicated for some time that it is in a hiking cycle in response to rising inflation risks, having put off upping the rates last year.

“Economic growth remains subdued, constrained by electricity supply disruptions and low business and consumer confidence and the risks to the outlook remain on the downside,” said Kganyago.

This interest rate hike could leave many in the red, as consumers will have to tighten their belts by another notch in order to make ends meet.

“Consumers already struggling with debt need to prepare themselves and find ways of cutting back on expenses so that they are not forced into opening other lines of credit to pay back loans that they already have,” said Ian Wason, CEO of DebtBusters South Africa’s largest debt counsellor.

Wason urged consumers that are already struggling with debt not to borrow any more money now and to concentrate efforts on paying loans that are currently outstanding.
 
International markets

Kganyago highlighted that since the previous meeting of the Monetary Policy Committee the global environment has been dominated by heightened uncertainty relating to the debt crisis in Greece and the sharp decline in equity prices in China.
The rand exchange rate has been relatively volatile lately too, and depreciated significantly since the previous meeting of the MPC.

“The rand, along with a number of other emerging market currencies, has been particularly sensitive to changing global risk perceptions relating to the Greek crisis, the volatility in the Chinese equity markets, declining commodity prices and expectations of the start of US monetary policy tightening,” said Kganyago.

Even though the trouble overseas seems to have lessened somewhat, Kganyago said that uncertainty towards the international market still remains.

This can be seen with the slowdown in China which continued to impact on commodity prices, with the platinum price, for example, declining to its lowest level in six years, explained Kganyago.

One upside, a price reduction for petrol of around 40 cents per litre is likely in August.

Domestic markets

Though the international markets were not the only worry of the MPC.
“Domestically, the growth outlook remains weak, as both the supply and demand sides remain constrained amid declining business and consumer confidence,” said Kganyago.

Adding to the woes, Eskom will be asking for a tariff increase to help meet their obligations.

“The headline inflation forecast assumes electricity price increases of 13% from July 2016 and July 2017. Although the current multi-year price determination allows for an 8% increase from July next year, Eskom is expected to apply for a claw-back on diesel usage, and this accounts for the additional 5% assumption in the model,” said Kganyago.

South African consumers are in for a bumpy ride. If you want to find out how to save money, and maybe even make some more, click here.