Reserve Bank crushing the economy – analyst

Independent analyst Roelof Botha said the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) does not know when to stop and is breaking the economy through high interest rates.

The Altron FinTech Household Resilience Index ticked slightly higher in the second quarter of 2023, meaning the average household’s financial disposition marginally improved.

However, the index showed no change year-on-year. With a base level of 100 for the inception period of the index (Q1 2014), the average household’s financial disposition has improved by only 9% in real terms over a period of more than nine years.

“The gains made in the post-Covid-19 recovery period have now been wiped out by the highest interest rates in 15 years, with the current real prime overdraft rate more than double the average rate that existed during the tenure of the previous SARB Governor, Gill Marcus,” said Botha, who compiles the index on behalf of Altron FinTech.

Botha told Business Day TV that, since Q2 2019, the Altron FinTech Index has declined by 1.2%. 

“Now, 1.2% doesn’t sound like a big number, but the dilemma is that over this period, the economy has hardly grown. We are still in a negative situation with regard to the jobs lost as a result of Covid, and there is no demand inflation in the economy,” he said. 

“So the main reason why the index is under pressure is because of the extraordinarily high interest rates.”

South Africa is currently in a hiking cycle that started in November 2021. The country has seen ten consecutive interest rate hikes since the start of the cycle and a cumulative 425 basis points of hikes, bringing the repo rate to 8.25%.

“It’s as if the Monetary Policy Committee just doesn’t know when to stop,” Botha said. 

“They are breaking the economy. They must take their foot off the brakes and hit the gas, and that means lower interest rates.”

He said that on the average value of mortgage bonds administered by Better Bond, homeowners are now paying almost R5,000 a month more on their mortgage bonds. 

“This is crazy, quite frankly, they are under tremendous pressure,” he said. 

“Nobody saw this coming because right now, South Africa has the highest real interest rate of any noteworthy economy in the world. But we also have the highest unemployment rate, so this is really quite strange to me.”

The MPC has raised the interest rate to this height to bring South Africa’s inflation down and within the SARB’s target range of 3% to 6%.

Inflation reached this target in June when annual consumer price inflation hit 5.4%. The downward trend continued in July when inflation hit 4.7%.

However, since July, inflation has again been trending upward, from 4.8% in August to 5.4% in September.

This has sparked fears of another rate hike, as the MPC has not ruled out another rate hike but has merely paused the current cycle.

Botha said the true reason behind inflation’s current upward trend comes down to two factors – the electricity tariff increase and higher fuel prices.

The electricity tariff increase only kicked in now and is running at 15.1% annualised. 

South Africa also saw higher fuel prices in the past two months as the oil price increased. 

However, Botha said these are insufficient reasons for the SARB to be concerned about inflation and hike the interest rate again.

“With a little bit of luck, the electricity issue will work itself out of the CPI as we move into the future,” he said.

“And with the rand having been slightly stronger and oil prices being slightly lower, especially the first two weeks of the month, we can actually look forward to a petrol price decrease next month.”

He said South Africa’s inflation peaked in July last year – something the MPC “refuses to acknowledge”. 

“We don’t have demand inflation in our economy, so why keep on raising interest rates? It’s not necessary; it wasn’t necessary in the first place.”