The long road to interest rate recovery
Whichever way you slice the inflation and interest rate debate, it now looks certain that your clients will struggle with their debt servicing expenses well into the New Year. Repeated interest rate hikes since November 2021 have seen the monthly repayment on a R1 million home loan jump a staggering R3 084, before you even consider the impact of repaying credit card debt or servicing hire purchases agreements. PS, that R3 084 goes a long way in investment and insurance worlds.
A somewhat surprising decision
One of the plus points in what has become another ‘annus horribilis’ for South Africa’s long-suffering citizens is that the Monetary Policy Committee (MPC) decided to keep South Africa’s repo rate ‘pegged’ at just (sic) 8.25% in November 2023, with the prime lending rate remining steady at 11.75%. Their decision took some analysts by surprise, with those who keep a close eye on consumer price inflation (CPI) suggesting that the South African Reserve Bank (SARB) might have dealt more decisively with early signs of inflation creeping back in, perhaps through another 25-50 basis point interest rate hike.
In sharp contrast, the pro-consumer types welcomed the decision, embracing it as a much-needed reprieve for struggling consumers. They quickly set about forecasting the biggest Black Friday buying frenzy ever, forgetting in their enthusiasm that such uncontrolled spending becomes a big contributor to inflation pressure. Whatever the case, many of the pre-decision commentators forecast the MPC decision correctly. In its assessment PwC said it expected the SARB to hold the repo rate steady. The firm listed four macroeconomic developments that took place during October and the first half of November as having the potential to ‘tie’ the usually hawkish central bank governor’s hands.
Firstly, from a financial markets perspective, the rand had strengthened against major currencies since the last MPC meeting in September 2023. “The stronger rand will reduce the cost of imported goods; and a favourable exchange rate position will further ease pressure on the cost of the country’s import basket heading towards the end of 2023,” said Lullu Krugel, PwC South Africa Chief Economist. A strong rand reduces headline CPI through lower prices for imported goods such as appliances, fuel and motor vehicles to name a few.
It is the economy, stupid
The MPC does not make its interest rate decisions in a vacuum. As such, the positive ‘spin’ from a stronger rand had to be weighed up in light of poor manufacturing and mining production data, and the likely negative impact of such performances on the country’s growth prospects. Statistics SA showed that manufacturing output slumped by 4.3% y-o-y in September 2023, while mining production was down 1.9% y-o-y. PwC noted that low international commodity prices and slowing global demand paired with domestic load-shedding and constrained port and rail services had contributed to a less than rosy growth outlook.
“While South Africa has received some positive employment data and better-than-expected retail sales numbers over the past week, the overall outlook for the economy remains downbeat following recent disappointing mining and manufacturing production reports,” noted Christie Viljoen, PwC South Africa Senior Economist. He said there was a good chance the SARB would lower its economic growth expectations for 2023 and 2024. This prediction proved false, with the central bank raising the country’s 2023 GDP growth number to 0.8% (from 0.7%). 2024 and 2025 remain dismal, with economic growth forecast at 1.2% and 1.3% respectively.
The third factor singled out by PwC was “cooling inflation in the world’s largest economy [that would] likely result in the US Federal Reserve (Fed) holding off on further interest rate hikes in the near-term, before easing monetary policy in 2024”. PwC explained that “while the SARB does not directly track international lending rates in its policy decisions, the South African interest rate premium over advanced economies is an important aspect in the valuation of the rand which, in turn, impacts the nature of imported inflation”. And finally, the fourth point, was that core inflation had shown favourable trends of late.
Rate reprieve to list holiday spirits
FNB responded to the MPC November 2023 rate decision with a mostly upbeat ‘Rate reprieve will lift holiday spirits after a tough year’ presser. “While many factors indicated the possibility of a rate hike today, the SARB’s decision to hold their key lending rate provides some relief after a challenging year,” said FNB CEO Jacques Celliers. He raised concerns over the decision coinciding with the “traditionally high spending during Black Friday and over the December-January holiday season. “I urge consumers to keep an eye on their financial needs in January next year as we go into this higher spending period,” he said.
For some advice-centric commentary on the decision, we reference a media note by Kim Silberman, Economist and Macro Strategist at Matrix Fund Managers. In a piece titled ‘Higher for longer, but no more hikes’ Silberman said that interest rates were deemed “sufficiently restrictive” at present to guide inflation back to 4.5%. And that echoes the consensus view that your clients will not face further interest rate hikes through 2024. The information contained in today’s newsletter bodes well for the fixed income return outlook, as mentioned in an article by Ninety One SA Fixed Income portfolio managers, Malcolm Charles and Adam Furlan.
The pair noted that local investors are currently being offered very attractive yields, with the yield on the 10-year South African government bond currently exceeding 12%. “As global inflation continues to moderate, we are seeing central bankers signalling that they are at or near the peak of the hiking cycle that has been a headwind for global fixed income markets; with the prospect of interest rates stabilising and economic growth showing more resilience than anticipated, we expect global investors to become more comfortable investing in emerging markets again,” they wrote. What happens next?
Cuts are coming, but no sooner than June 2024
PwC expects the next interest rate decision to play into consumers’ hands, though you may have to wait until June 2024 for the first cut to be announced. “It is quite certain that the SARB will not be cutting the repo rate as deeply as it did during the COVID-19 crisis; at present, we believe the repo rate could ease by a cumulative 150 basis points between mid-2024 and end-2025,” PwC wrote.
Silberman agreed, for the most part: “We expect that the SARB will start to cut rates in line with the Fed, in the first half of 2024”. Silberman added that any decision by the SARB to cut rates before the Fed would have a negative impact on the rand, thus contributing to imported inflation. Unfortunately, financial advisers may have to balance the good news on interest rates with some bad news on salary expectations.
“With inflation now stabilising and even declining around the world, consumers and businesses should be aware that salary adjustments will follow a similar pattern; the prospect of lower rates in 2024 should not generate a strong reaction from borrowers,” Celliers warned. And that, dear reader, is one of those catch-22 moments that litter the financial advice and financial planning landscape.
Writer’s thoughts:
The 24-month-long interest rate hiking cycle has caused significant hardship for businesses and consumers, forcing many to make tough financial decisions. How do you help your clients to keep their financial plans ‘on track’ when inflation and interest rates bite? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
