Consumers warned to brace for rate hikes
Economists have warned South African consumers and businesses to brace themselves for interest rate hikes as inflation is set to spike due to surging oil prices and a projected electricity tariff increase.
Despite Reserve Bank governor Gill Marcus keeping the benchmark repo rate on hold at 5.5% on Thursday, there is broad consensus among economists that interest rates may go up as early as the second half of this year or the first quarter of 2012.
Kabelo Masike, a senior economist at Eskom, provided sage advice for consumers and companies on how to cushion themselves against high interest rates.
“If you are a consumer, get out of debt because the cost of debt is going to rise in the next 12 months. If you are a company and your loans are linked to a floating rate, think about fixing your interest rates now because you are going to pay in 12 months from now,” advised Masike.
Oil prices have been rising sharply since the eruption of anti-government protests earlier this year in North Africa and the Middle East, the epicentre of the world’s oil production.
Already an armed rebellion against Libyan leader Muammar Gaddafi has halted oil production, sending crude prices higher even though the country is only the globe’s ninth-largest producer.
There are growing investor fears that Saudi Arabia, the world’s largest oil exporter, could be the next focal point of political uprisings which have already toppled long-time leaders in Egypt and Tunisia and spread to other Arab states such as Yemen, Syria and Bahrain.
Since the beginning of the uprisings in mid-January the oil price has increased from R712 a barrel to R799 a barrel. As a result, the petrol price has increased by 97c a litre so far this year and economists say another increase of 50c a litre is on the cards next month.
Apart from the oil threat, economists are also worried about rising food prices and wages, which could set inflation alight.
Business Day reported this week that consumers could be hit by a further hike from Eskom – over and above the 25% tariff increase they are facing this year.
The hikes will help to fund part of Eskom’s infrastructure investment programme, which it is estimated will cost more than R400 billion.
Economists say, however, that inflation could have been a lot higher in South Africa were it not for the rand’s strength.
“Fortunately the rand is limiting potential increases in inflation, because we could have had much higher inflation,” said Efficient Group economist Dawie Roodt.
Roodt said consumer inflation – which Statistics SA said this week was unchanged at 3.7% in February – would end this year slightly lower than or above 6% and hover between 4% and 6% in 2012 to 2013.
The Reserve Bank expects inflation to average 4.7% in 2011 and 5.7% in 2012, well within the target range of 3% to 6%.
Roodt dismissed suggestions the rand might weaken as a result of Japanese investors pulling funds out of emerging markets like South Africa and Brazil to rebuild after the devastation caused by the nation’s recent earthquake and a tsunami.
“The Japanese disaster has already led to a stronger yen as funds are being repatriated mainly from the US back to Japan. This has weakened the US dollar while the rand has strengthened,” said Roodt.
Last week Societé Générale SA, the local arm of French bank Societé Générale, predicted the rand could depreciate by 5% against the dollar if Japanese investors were to sell their rand-based Eurobonds, known as uridashi, which financial information group Bloomberg estimates are worth roughly $3.9 billion.
Investec economist Kgotso Radira said although he expected the Reserve Bank to hike interest rates, he did not expect aggressive tightening as this could hurt economic recovery and efforts to create jobs.
“We expect the first interest rate hike of 50 basis points in November this year. Going into 2012, we think monetary policy will still be accommodative, with gradual increases in interest rates rather than an aggressive approach,” said Radira.
“The reason for this is that economic activity has not returned to pre-crisis levels. Policymakers will try to support the recovery in the economy at all costs.”