The South African Reserve Bank’s decision to hike interest rates highlights the growing inflation risks currently building both globally and locally, with South African households now facing even greater financial pressure. Reserve Bank governor Lesetja Kganyago announced on Thursday afternoon that the interest rate has been increased by 25 basis points to 7%, amid rising inflation, higher fuel prices and ongoing geopolitical uncertainty. According to Thys van Zyl, Chief Executive Officer of Everest Advisory Services (Pty) Ltd (FSP 49495, CAT I), the decision indicates that the Reserve Bank is becoming increasingly concerned about the sustainability of inflationary pressure in the economy.
“The latest inflation figures have already shown that the impact of rising energy prices and global tensions is now filtering through more rapidly into the South African economy. The Reserve Bank likely felt it needed to act decisively to manage inflation.”
Inflation surged to 4% in April after moving close to the Reserve Bank’s preferred 3% target earlier this year.
“Fuel prices, transport costs and other input costs are now beginning to create broader inflationary pressure. Once these costs start filtering through into food prices, services and general household expenses, it becomes increasingly difficult for central banks to keep interest rates unchanged.”
South Africa now finds itself at an important economic turning point, says Van Zyl.
“Following the Covid-19 pandemic, the economy never truly regained momentum, and there is now a risk that the country could miss an opportunity to fully benefit from the recovery in the JSE, the stabilisation of inflation and a sustainable lower-interest-rate cycle.
“The past two years presented an opportunity for South Africa to rebuild its economic foundation through stronger growth, improved infrastructure, energy reform and greater investor confidence. The question now starting to emerge is whether that opportunity was fully utilised.”
The next few months will likely be decisive, says Van Zyl.
“Local political developments and municipal elections could potentially improve sentiment and confidence in South Africa if voters begin demanding stronger governance, stability and economic reform. Ultimately, however, time will determine whether South Africa can successfully capitalise on this economic turning point.”
According to Van Zyl, the conflict in the Middle East and rising international oil prices remain among the biggest risks to the global economy.
“The world remains extremely sensitive to energy prices and supply risks. As long as geopolitical tensions persist, central banks around the world will remain under pressure to manage inflation aggressively.”
He believes the Reserve Bank’s decision will place additional pressure on South African consumers who are already struggling with rising living costs.
“Households are already experiencing significant pressure in the form of more expensive fuel, higher transport costs, rising food prices and now additional pressure on debt repayments. For many consumers, financial breathing room is becoming increasingly limited.”
Van Zyl warns that higher interest rates could also place economic growth under pressure.
“While higher interest rates may be necessary to control inflation, they simultaneously place further pressure on consumer spending, business activity and economic growth. It remains a very difficult balancing act for the Reserve Bank.”
He believes Moody’s recent decision to improve South Africa’s credit outlook does provide a measure of long-term optimism.
“The improvement in South Africa’s credit outlook indicates that confidence still exists that reforms in areas such as energy, logistics and fiscal management are gradually beginning to stabilise.
However, this positive sentiment could quickly come under pressure should global inflation and energy prices deteriorate further.”
Van Zyl adds that the international environment remains exceptionally uncertain.
“For nearly seven years, the world has been moving from one crisis to the next — from Covid-19 to the war in Ukraine and now the Middle East. These global disruptions continue to pose significant risks to inflation, economic growth and interest rates worldwide.”
According to Van Zyl, the latest interest rate increase sends a clear message that the battle against inflation is far from over.
“The biggest risk at present is that higher energy prices and geopolitical tensions persist for longer than expected. This means consumers and businesses need to prepare themselves for a more difficult economic environment where financial discipline and forward planning will become more important than ever.”
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Author: Sya Potgieter from https://everestwealth.co.za/ on behalf of Everest Wealth.
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