Why South Africa Should Expect an Interest Rate Hike
South African consumers have not only been hard hit by increasing food prices, unemployment, increasing cost of electricity and other living expenses. They should now be prepared for interest rates hikes. This was evident in two sets of data released by Statistics South Africa yesterday.
The data pushed up the odds of the Reserve Bank raising interest rates to control inflation during its first meeting of the year scheduled to hold next week.
According to the data released by Stats SA, consumer inflation for last month rose to 5.2% compared to a year ago, from 4.8% in November. The acceleration was its quickest in a year due to higher food and household services costs.
Retail sales — an indicator of household spending — increased much more than expected in November as general dealers and retailers in textiles, clothing, footwear and leather goods showed resilient sales.
The current increase in inflation and the deterioration in the inflation outlook due to rand weakness points to a rate hikes. On phase value one may argue that better retail sales suggest consumers can still handle more hikes. However, this needs to be evaluated against consumer debts and borrowing. One should expect the reserve bank to start raising interest rates this year by a 25 basis point.
The worse is yet to come for South African consumers if the current circumstances do not change. Interest rate hikes will mean bad news for consumers with loans and increased cost of borrowing for small businesses who already struggle to get access to finance.
Food prices are expected to increase further with the current drought in the country and imported maize will be costing far more than home grown and its price will be compounded with the low value of the rand. SA consumers need to be cautious this year in all expenses as the economy has gloomy prospects of growth leaving consumers with constrained earnings.