Reduce spending as rates may climb

“South Africans all need to play a greater role in curbing inflation through lower expenditure,” says Johan Pyper (pictured), head of investment research at niche asset manager Plexus Group. “If inflation increases to above 12 percent, South Africa may indeed face the consequences of the full 2 percent interest rate hike that Tito Mboweni warned about last month.”

“With inflation continuing to rise, we are not yet at the peak of the interest rate cycle,” says Pyper, commenting after today’s announcement of a 50 basis points hike in the key repo rate. “If inflation does not move sideways or even downwards soon, it may be possible that rates will be raised by another 1.5 percent over time.”

Interest rates have been hiked by 500 basis points since June 2006, and now there are clear signs that the consumer is struggling. For this reason, Plexus believes the increase in the key repo rate on Thursday was limited to 50 basis points, in line with its expectations.

“Inflation is not just being driven by high oil and food prices,” says Pyper. “If oil and food prices are stripped out of the inflation calculation, inflation still exceeds the Reserve Bank’s upper limit of the 3 percent to 6 percent band.”

Although these prices play a part in fueling inflation, he says other factors are also contributing significantly to inflation. A future risk to inflation is Eskom’s electricity price increases.

“Although there has been a decline in household spending and a moderation in credit extension to the private sector, people need to exercise further discipline by cutting back on non-essentials and spending less on credit for inflation to decline,” says Pyper.

The full effect of a hike in interest rates generally takes up to 18 months to work through to inflation. According to Pyper the result of the cumulative rate increases may thus take up to 2009 to be fully discounted in the inflation rate.