The South African Reserve Bank (Sarb) Governor, Lesetja Kganyago has announced that South Africans should brace themselves for an interest rate hike of up to 50bp (basis points) as the rand continues to hover at record low levels.
This decision is due to the lack of direction coming from the United States’ Federal Reserve Bank (Fed) on Wednesday, as it kept the rates steady while indicating that its focus has now moved to looking at global markets rather than zeroing in on its own data in determining a rise in rates. The Fed also added that it could be the strong labour market that is causing the potential increase of rates.
According to Adam Phillips, independent treasury specialist to corporates at Umkhulu Consulting said that in South Africa the debate will be between hikes of 25 or 50 basis. If the latter is chosen then the rand could gain some strength.
Citi Research on the other hand stated that they forecast a larger incremental 50bp rate hike this time, given both an extended breach of the 6% target ceiling in our CPI (consumer price index) outlook and heightened inflation risks (in ZAR and food prices mostly).
"No matter which path the Sarb chooses, we see a total 100bp (basis point) in rate hikes in 2016. To do a 50bp hike now makes sense to us for it gives the MPC more options in March (pause, +25bp or +50bp) which keeps it ahead of the curve."
Debt Rescue CEO, Neil Routes said that furthermore, the repo rate increases will immediately translate into higher prices for all commodities including food.
The immediate future looks dismal for all consumers, but especially for consumers with heavy debt loads.
"There is also a strong likelihood that South Africa’s staple food – maize meal – may increase by as much as 50%. According to experts, this is going to mean that many South Africans are going to experience hunger," warned Roets.
DebtBusters CEO, Ian Wason agrees with Sarb’s Monetary Policy Committee (MPC) decision to increase the repo rate. This is because of the poor economic growth, the commodity price slump and potential further US rate hikes.
Wason pointed out that the expected interest rate hikes, coupled with electricity tariff increases, water restriction penalties and soaring food prices soaring as a result of the ongoing drought, are just some of the financial risks SA consumers are going to be dealing with during this tough time.
Consumers need to prepare themselves and find other means to pay their monthly expenses as opposed to taking out loans,” cautioned Wason.
DebtBusters' latest Debtometer Report shows that its clients require 102% of their net income to service their debt before paying for any living expenses. “This is just the beginning of tougher financial times for consumers, with 2016 poised to be a strain for consumers, especially those living on the bread line,” said Wason.
In particular, he warned middle- and-upper income earners to watch out for higher living expenses and to factor these into their monthly household budgets.
“These consumers have houses, cars and ample monetary commitments, such as school fees and mobile contracts. An expected repo rate increase, coming on the back of the festive season spending spree and already maxed out credit facilities, could be the tipping point for many South Africans, where they will no longer be able to service their financial commitments,” he said.
The Head of Research and Investments at PPS Investments, David Crosoer concluded that while added that while some of the deterioration in this outlook is already priced into South African government bonds and cyclical equities, it is clear that things could still get worse before they get better.