Economic Update
The governor of the South African Reserve Bank (SARB) has suggested a further increase in the interest rate might curb high consumer spending after the latest inflation figures came in well above the bank’s target and household debt levels remained disturbingly high.

Hours after the May consumer inflation figures were released on June 27, bank governor Tito Mboweni said that having kept interest rates low for an extended period, many people had acted as if the reserve bank had held a party.

With CPIX (consumer inflation less mortgage costs) coming in at a year-on-year 6.4%, Mboweni said these figures would further “spoil the party”. The bank’s own expectation had been that inflation would be around 6.2 to 6.3% as of the end of May, in line with the April figure of 6.3%. The reserve had originally targeted a year-end inflation rate of between 3 and 6%.

“Some people might be saying Mr Mboweni is failing as inflation needs to be below 6%, but I say maybe we have been too nice with interest rates being too low,” said Mboweni.

Many South Africans had not been used to living in a low interest-rate environment and had responded by going on a spending spree, Mboweni said.

“People went into all kinds of expenditure – some of it was necessary expenditure – then they thought maybe interest rates will go down further and they bought second 4x4s,” he said.

“Then people began to use their access bonds for current consumption. It was a good idea for someone to be granted a mortgage, which I fully support, but no sooner [had they gone] through revaluation, they had an access bond for another car and other things.”

The reserve last raised the interest rate on June 7, increasing its repo rate by 50 basis points to 9.5%. Mboweni’s “party” speech has been widely interpreted as signalling another rise is on the cards. Interest rates have been hiked by a total of 250 basis points since mid-2006.

Some analysts have said that with inflation above the SARB’s target, there may be a need for a rate hike.

ETM market analyst George Glynos said the ongoing upwards trend in inflation “..will raise the probability that the reserve bank will have to move on interest rates. We all thought the April figure was the peak but it obviously was not.”

“Investors need to get used to the idea that interest rates will remain high for some time to come,” said Glynos.

However, other analysts say the reserve may hold off on any further rate rises, hoping that the June 7 increase may take effect within the next few months. One of these was Goolam Ballim, chief economist at Standard Bank.

“The SARB is mindful of the idea that it would be tightening into a slowdown in terms of household economic spending,” Ballim said during a local radio interview on June 27. “And as a consequence, I cannot see an overwhelming and unambiguous case where, despite inflation having printed as ugly as it has, that they would absolutely have to raise rates.”

While taking a slap at high consumer spending, which has left the ratio of household debt to disposable income at 73%, Mboweni also acknowledged that rising food prices, especially for maize, were adding to the inflationary pressures.

“Many of our people survive on maize but as a consequence of the globalisation process the price of maize is now […] set at the Chicago Board of Trade, so the price tends to be the same globally,” he said. “The unbelievable increase has made life a little difficult for many of us.”

Increases in food prices were the largest single factor in pushing up the May inflation figures, which accounted for 2.4%, and rises in transport costs, mainly due to fuel price increases, which added a further 1.1%.

Markus Ridle, an economist at Absa, said, “CPIX is obviously up due to food prices and fuel. This is negative for interest rates, we were hoping it would slow down and that April would peak at 6.3%.”

South Africa’s interest rates are near 20-year lows, despite the SARB’s decision to raise them by two full percentage points in the second half of last year. The bank’s quarterly bulletin released in June showed that household spending slowed only slightly in the first quarter of this year, implying that tighter monetary policy has so far had little impact on consumption.