Although everybody had only anticipated the next interest rate hike in January 2016, the Reserve bank (SARB) Monetary Policy Committee (MPC) decided yesterday in their last meeting of 2015 to hike its policy Repo Rate by a further 25 basis points to 6.25%, a move that will see Commercial Banks raise their Prime rates to 9.75%. This brings the cumulative rate hiking in the current cycle to 1.25 percentage points.
SARB doesn’t see major inflation problems in the near term, but nevertheless forecasts some deterioration from an average forecast CPI inflation rate of 4.6% in 2015 to 6% in 2016. Some years of Rand weakness, with possible 2nd round inflationary effects, were mentioned in the MPC statement as an upside inflation risk, along with sharp electricity tariff increases and possible drought-related food price increases. The SARB also remains concerned with high average wage increases It was mindful of a bleak economic growth outlook, forecasting GDP (Gross Domestic Product) growth of only 1.4% in 2015 and 1.5% next year, but believes that even with the announced interest rate hike monetary policy remains accommodative.
h3. The Merit of the Decision
From a current inflationary point of view, there wasn’t too much short term pressure on the SARB to raise interest rates in a hurry. CPI (Consumer Price Index) inflation for October was 4.7% year-on-year, only slightly up from the previous month’s 4.6%, which is still just about in the middle of the 3-6% target range. The main inflation drivers are not controllable by the SARB In addition, if one looks at some of the most troublesome components of the CPI, they include Education, Electricity, Water and Municipal Rates. Interest rates have little real influence over the price setting process in these areas of the economy, so these inflation drivers are largely beyond the SARB’s control. Lending rates positive in real terms At the current Prime Rate of 9.5% and Repo at 6% (before today’s announced hike), and given the prevailing CPI inflation rate, that translates into a positive Real Prime Rate of 4.8% and a Real Repo Rate of about 1.3%.
That should already go some way to containing growth in consumer spend at a time when Consumer Confidence is very low, some would argue. Prime rate levels don’t really encourage housing speculation Prime Rate is also above the average rate of house price inflation, implying a positive real rate should one adjust Prime Rate to a real rate using the FNB House Price inflation rate. This implies little room for speculation in the housing market by speculators wishing to use cheap credit to make a quick capital gain. Rapid capital growth just isn’t there at the moment. From a Household Sector Credit growth point of view, too, there has been no urgent reason to hike interest rates. Household Sector Credit growth measured 4.3% year-on-year in September, which is probably still below Nominal Household Disposable Income growth, and should thus translate into further near term decline in the all-important Debt-to-Disposable Income Ratio.
h3. Slow Hikes may be a Blessing
We do believe, however, that gradual hiking by the SARB can assist in correcting certain Macroeconomic imbalances, and is thus desirable.