Electricity prices may strain Reserve Bank’s interest rate increases
Efficient Group chief economist Dawie Roodt said that electricity price increases may limit the Reserve Bank’s ability to increase interest rates further.
An electricity tariff increase of 18.65% came into effect on 1 April for electricity customers supplied directly by Eskom. Municipal customers will have a similar price hike come into effect on 1 July.
The National Energy Regulator of South Africa (NERSA) announced that electricity prices are set to increase by 33% over the next two years.
Eskom applied for a 32% increase for only 2023/24. Still, NERSA’s decision to award this increase over two years drew sharp criticism.
Eskom acknowledged the pressure this increase would put on consumers but said that the hikes would contribute positively to the utility’s financial position.
The fact that consumers will be under pressure from the electricity tariff hike is what could constrain the ability of the South African Reserve Bank (SARB) to increase interest rates.
When interest rates are raised, consumers are put under more pressure as debt such as home and business loans become more expensive to pay back.
If more money is spent on repaying debt, less money will be spent on everything else.
In theory, this decrease in demand for goods and services should reduce price pressure and therefore bring inflation down. This is the only goal of the SARB.
Practically though, there is only so much pain that South Africans can tolerate. The sharp increase in the electricity tariff will place South Africans under pressure and make it difficult for the Reserve Bank to inflict more pain.
The SARB recently shocked South Africans by increasing the interest rates by 50 basis points, which brought the repo rate to 7.75%. A 25 basis point increase was widely expected.
Speaking to Jacaranda FM, Roodt said it is better to get inflation under control now so that interest rates can be eased later as inflation cools down.
He said there are other ways to bring down inflation, but raising interest rates is a politically feasible way to cool inflation, which currently stands at 7%. The target range for inflation is 3% to 6%.
Roodt said that creating a competitive environment is the best way to achieve important macroeconomic goals.
“The best approach is not to increase electricity prices but to create a more competitive environment, including generating and distributing electricity,” he said.
“That will eventually lead to lower electricity prices for the consumer in South Africa, lower inflation, and of course, at the end, lower interest rates as well.”