South African Reserve Bank Governor Lesetja Kganyago has a hard task ahead of him as inflation hits 4%.
Image: SARB
South Africans are again facing the prospect of higher borrowing costs as economists increasingly expect the South African Reserve Bank (SARB) to raise interest rates this week after inflation accelerated to 4% - the highest in 19 months.
The SARB’s Monetary Policy Committee (MPC) announces its latest interest rate decision on Thursday, with growing expectations that the central bank could increase the repo rate by 25 basis points in a move aimed at containing inflation risks linked to the Middle East conflict and higher oil prices.
If the SARB hikes by 25 basis points, the prime lending rate would rise from 10.25% to 10.50%. The fears come as many households are already struggling with rising living costs, weak economic growth and unemployment levels at almost 33%, officially.
Samuel Seeff from Seeff Property Group urged SARB not to raise rates, arguing that the recent inflation increase was largely caused by external factors rather than excessive consumer demand.
“The higher inflation is largely imported. It is not the fault of consumers overspending in the economy, and they should not have to bear the brunt and the uncertainty of not knowing when, or if, it will come down again given how conservative the bank has been,” Seeff said.
Seeff said the recent jump in inflation reflected fuel price increases caused by the Middle East conflict and higher electricity tariffs rather than overheating in the local economy.
“With 345,000 jobs lost in the first quarter and unemployment up to 32.7%, economic optimism is weakening,” Seeff said.He warned that another rate hike could further slow the economy and place additional pressure on households already battling high debt costs.
The property sector is particularly sensitive to interest rate movements.
According to Bradd Bendall from BetterBond, a 25-basis point increase would still affect affordability for many consumers despite interest rates remaining below 2024 highs. “For example, on a R2 million bond, monthly repayments will still be roughly R1,700 cheaper than they were two years ago,” he said.
However, Bendall warned that first-time buyers were already facing tighter affordability conditions. “Upfront deposit requirements have already surged by 38% for this segment in April alone,” he said.
Historical interest rates.
Image: Trading Economics
Bendall said younger buyers were increasingly being pushed towards alternative strategies such as “rentvesting,” where consumers rent in preferred areas while “purchasing affordable, high-yield investment properties elsewhere to get a foot on the property ladder”.
At the same time, economists and currency analysts say the SARB may still feel compelled to act because of rising inflation risks linked to global oil prices and currency pressures.
Middle East tensions and uncertainty around the Strait of Hormuz have pushed oil prices sharply higher in recent weeks, increasing the risk of higher fuel and transport costs feeding through into broader inflation.
Lara Hodes from Investec said upside risks to inflation had increased because of the conflict. “The SARB is likely to hike rates by 25bp to 7% this week acting pre-emptively to prevent any second-round effects from becoming embedded in inflation,” she said.
The increase from 6.75% to 7% is the policy rate, which is a short-term interest rate which affects many other rates in the economy.
Lerato Ntuli from Anchor Capital said inflation risks remained “skewed to the upside”. She noted that inflation had now moved to the upper end of the SARB’s newly adopted 3% target framework.
“Should the Middle East conflict persist, elevated global oil prices are likely to continue placing pressure on domestic fuel and transport costs,” Ntuli said.
Currency markets are also watching the decision closely.
Harry Scherzer from Future Forex said aggressive central bank policy in which rates were higher for longer acted as “a vital shield for the local currency”. He warned that a weaker rand would increase imported inflation risks through fuel and energy costs.
Meanwhile, bond markets are increasingly focused not only on whether the SARB hikes rates this week, but also on what it signals about future moves.
Kristof Kruger from Prescient Securities said markets had already largely priced in a 25-basis point increase. He said investors were closely watching whether the SARB signalled that more rate hikes could follow if inflation and oil prices remained elevated.
Yet, Kruger said “SARB is not signalling the end of the cycle”.
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