Posted on: 07-02-2016 in Finance
South Africans are feeling the financial pain after the Reserve Bank decided recently to hike the interest rates by 50 basis points from 6.25% previously, up to 6.75%. This is the first interest rate hike this year in a series of multiple rate hikes that will follow and push the benchmark rate to 11% by the end of the year, according to expert analysts. This was a widely expected decision by the markets, which looking forward is going to have an overwhelming shock on consumers, as it means that repayments for cars, home loans, bank loans and other debts are set to go up, leaving people with less money in their pockets. A rate hike means that the borrowing cost will go higher as well.
The main job of the Reserve Bank is to keep the inflation rate below 6%, however, its mandate has needed to be extended to promote economic growth as well, but after the Fed has started normalising interest rates later in 2015, the South African Reserve Bank has now been forced to be more aggressive in order to mitigate the potential negative impact of higher US rates. Because of the weakness of the economy and the fact that inflation doesn’t appear to be out of control, the rate hike can exacerbate South Africa’s financial problems.
Businesses and consumers are likely to feel even more financial pain soon and also new spending and investments are going to be held back, which inevitably will lead to lower levels of spending resulting in retail sales becoming seriously under threat. This will make it possible for an even further downgrade to the outlook of growth in the overall economy.
The weak Rand means more economic pain and after hitting an all-time record low, in the beginning of the year, against both the US dollar and against the British Pound as well, the currency exchange rates have stabilised after the rate hike. The value of the Rand has been on a steady decline since the global financial crisis of 2008 and the global recession of 2009. We believe that a weak economic growth and the ongoing severe slump in the commodity prices and exports mean that the Rand’s weakness is here to stay, which spells more bad news for consumers starting with higher food prices.
We believe that in the next month, the national budget is set to be the worst on record, and with shrinking tax collections, this will further constrain the government’s ability to meet the country’s growing special needs, such as education, health and social care.