Cost of debt rises as SA Reserve Bank raises interest rates…

This increase, the largest since 2016, brings the repo rate to 4.75% and the prime rate to 8.25%.

To put that into perspective, if you had a 20-year prime rate mortgage of R2 million with no deposit, your monthly payment just increased by R623 – while your total interest payable over the term of the loan increased by R150,000.

Explaining to reporters the reasons for his decision, SA Reserve Bank (SARB) Governor Lesetja Kganyago said South Africa’s economy is expected to grow by 1.7% this year, up from 2% at the time of the meeting. Of March.

This is due to a combination of short-term factors including flooding in KwaZulu-Natal and ongoing power supply constraints.

Production growth in the first quarter of this year is expected to be 3.6%. However, the upward trend in global producer prices and food price inflation in recent months is expected to continue due to the Russian-Ukrainian war, which is expected to persist until the end of 2022.

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“Oil prices have risen sharply since the start of the war and could rise further as tensions in energy markets escalate,” Kganyago said.

“Electricity and other administered prices continue to present risks in the short and medium term. Higher-than-expected inflation prompted major central banks to accelerate the normalization of global policy rates, tightening global financial conditions.

“Overall, with a few exceptions, capital flows and market volatility are likely to remain for emerging market assets and currencies,” he said.

Johann Els, chief economist at Old Mutual Investment Group, said the increase was part of the SARB’s efforts to anticipate rate increases with only one meeting in the second quarter of this year and the next meeting towards the end of July.

“I still see 50 basis points of rate increases for the rest of the year, with an increasing likelihood that the Monetary Policy Committee will not raise rates at every meeting for the remainder of 2022, but we will see very probably rates will rise another 50 basis points next year,” he says.

Paul Makube, senior agricultural economist at FNB Agri-Business, says rising debt-servicing costs will erode profit margins for farmers who are already facing huge input cost pressures due to the escalation induced by the war on the cost of fertilizers, herbicides, pesticides and fuel.

Total agricultural debt stood at R191 billion in 2020, which has increased with a compound annual growth rate of 10.4% over the past five years.

Bianca Botes, director of Citadel Global, noted that the increase marked the biggest rate hike since 2016.

“The SARB faces and will continue to face the difficult dilemma of having to raise interest rates to combat soaring inflation – in line with the rest of the world,” she said, adding that unlike the United States- United and in the EU, South Africa is not starting from a weak base, but faces an economy that is already under strain with consumers struggling to meet financial demands.

The rand responded positively to the announcement, gaining a total of 1.49% as of 4 p.m. Thursday.

Botes says the dollar’s decline – in conjunction with the SARB’s tightening action – helped the rand gain momentum, strengthening from a low of 16.09 rand seen earlier in the day .

“Gains were capped, however, as much of the upside was already priced in before the announcement, in line with market expectations.

“The big question is whether this strength will be sustainable, and much of that will depend on the broader global environment and risk appetite towards emerging markets and emerging market assets,” she says.

Although the 50 basis point rate hike was widely expected, not everyone agreed with it.

Dr Andrew Golding, managing director of the Pam Golding Group, argues there was good reason to raise the rate by just 25 basis points.

“Given the fragility of the local economic recovery, with high unemployment, rising levels of poverty and household finances under pressure from rising prices – including the prospect of another significant fuel price hike in June – any increase in the repo rate would overburden consumers and further dampen the economy.

“This is all the more so given the impact of persistent power cuts and recent flooding in KwaZulu-Natal on the economy,” he said.

Golding points out that before the war in Ukraine, the Reserve Bank had managed to anchor inflation expectations around the midpoint of the inflation target – which allowed the SARB to aggressively cut interest rates at the start of the lockdown.

Now, however, there are signs that high inflation is having an impact on inflation expectations, leading to recent wage demands above inflation in both the public and private sectors.

In the most recent case of higher wage demands, the National Union of Metalworkers of South Africa and the National Union of Miners are demanding a general wage increase of 15% over one year and a housing allowance of R1,600 for Eskom. workers.

Golding says that although it is accepted that South Africa needs to normalize interest rates from pandemic-induced lows in line with the Fed, to avoid further rand weakness, he had hoped that the increase would be 25 basis points, rather than the widely expected 50 basis points.

Although Golding remains optimistic about the residential real estate market for 2022, John Loos, real estate strategist at FNB Commercial Property Finance, anticipates a further slowdown in sales in the commercial real estate sector in the second half, due to rising interest rates. rate hike after three more moderate increases of 25 basis points. BM/DM

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