Rate hike ‘could fuel inflation’

Donwald Pressly, Cape Messenger’s editor, considers the implications of a repo rate hiking cycle. On Thursday 28 January 2016 the Monetary Policy Committee raised rates by 50 basis points. He argues that it could have the opposite impact to that intended – it could fuel inflation

29 January 2016 – This is not good news for the poor and the middle class. At a time when unemployment is soaring, household debt is shockingly high and food prices are frankly absurdly high – with a strong indication that the drought and importations of food using a plummeting rand will push food costs even higher, the SARB has taken the wrong decision.

The problem is that South Africa is not a middle class country. In countries like Australia and Canada, governments can – and have – changed because of punitive interest rate hikes. Voters vote with their political feet and put their crosses against other political parties (parties other than the governing party at the time). Here the chances are less likely that the poor and the middle class will revolt against the ANC over paying more for their debt, business loans and household mortgages.

No wiggle room

Why so? Well the middle class more or less doesn’t vote for the ANC already. The poor tend not to have housing bonds. But they are hit by other forms of debt which becomes more costly. DebtBusters CEO Ian Wason puts it crisply: “There is no more wiggle room for consumers to escape debt burdens. This does not bode well for South African consumers… it means they will be paying even more towards their debt. Consumers were already struggling with their debt before this announcement. An increase in their loan repayments is now at the ‘debt-end’ we have been warning consumers about.” He points out that nearly 54% of credit active consumers in SA are experiencing financial problems with their accounts.

The repo rate rose to 6.75% from 6.25% – significantly above the inflation targeting band of between 3% and 6%. One could argue that this hike is itself an inflation driver as most clients will not be garnering below prime rates – and probably the bulk of poor lenders will be paying much more punitive rates in double figures.

There is little chance that there will be a political fallout because of hikes – Peter Attard Montalto of Nomura is anticipating a rates hike cycle with the next 50 basis point hike in May and quite a few hikes after that. Voters may protest in the upcoming municipal elections and vote against the ANC, but this seems unlikely. People will not associate the rates’ hike with the government or the governing party. Local government, in any case, has little – if anything – to do with the determination of fiscal and monetary policy.

SARB doesn’t enjoy much power

Unfortunately the SA Reserve Bank doesn’t have a host of instruments to fight inflation. Raising rates is just about all the bank can do. Even though they are considered cautious by only increasing the repo by 50bp, this decision is most unlikely to fight inflation. It is likely to fuel it – as more and more people reach the debt end. It also puts pressure on businesses with bank loans. It will have a consequence for existing jobs and it will also undermine any prospect of the creation of jobs. It will also dampen business confidence.

The way to fight inflation is to massively curtail government spending, cut personnel costs of government and conduct a massive campaign for consumers to buy local. Raising rates won’t assist anyone to do the latter. The SARB should have kept the rate at 6.25%.

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