‘Careful footwork’ required by Sarb for rate hike announcement

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JEREMY MAGGS: So let’s continue the conversation. South Africans are facing another interest rate hike this week. The South African Reserve Bank (Sarb) holds its Monetary Policy Committee (MPC) meeting this week, the announcement on rates expected roundabout this time (3pm) tomorrow. So let’s look ahead to that announcement and the broader economic climate with treasury economist at Investec, Tertia Jacobs. So what does the background look like and what sort of movement then are you anticipating tomorrow?

TERTIA JACOBS: Thursday’s MPC interest rate announcement is going to be delivered in a different context than in March. Subsequent to the March MPC meeting when the Reserve Bank hiked the repo rate by 50 basis points, flagging upside risks to inflation, some of the risks have materialised, and these pertain to the performance in the ZAR/rand that has continued to depreciate by another 6%, driven basically by SA specific factors.

The market is pricing in a higher country risk premium, and that’s related to fears of a blackout in winter as load shedding intensifies, as well as the US-Russia diplomatic spat, with very little direction from government as to where we are heading.

So the number of risk events in coming months is very high, and, therefore, the market is very concerned, and when you look at what’s priced into the market, the risk premium has increased significantly. So what is going to be important on Thursday is how the governor is going to navigate through an economy that is weakening, but inflationary pressures remaining quite elevated.

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JEREMY MAGGS: So Tertia, as a result of that analysis, then, how do you foresee an interest rate hike impacting the overall economic climate in South Africa going forward? In other words, what is the expectation for the next couple of weeks after the announcement?

TERTIA JACOBS: So it’s very important then from an interest rate perspective to understand what the driver is of this rand weakness, and we won’t ascribe it to external factors. For example, US rate hikes, a significantly stronger dollar.

It’s more specific factors. Then the next question is to what extent can interest rates actually fix this dynamic, and monetary policy cannot deal with this type of uncertainty that South Africa is facing.

It is a political problem, it’s a management problem, it’s a policy issue that needs to be addressed by the president.

So looking at monetary policy, the repo rate has been increased from 3.5% to 7.75% over 18 months or so. So the Reserve Bank must also be aware that there’s a lagged impact as interest rate debt servicing costs have actually started to increase. So monetary policy where we stand now, is very restrictive and it’s definitely hitting disposable income. But at the same time, the challenge for the Reserve Bank is that they can’t stand on the sidelines, not doing anything. So it’s a major dilemma.

It will require actually a lot of wisdom and careful footwork from the Reserve Bank to communicate the right message and also balance its decision with these opposing dynamics in the economy.

JEREMY MAGGS: What I’m hearing you say is that it’s almost a recalibration of thinking that we need, that the concerns are only going to be addressed by a change of political will, and I suspect you would also call for greater private sector involvement, particularly when it comes to the infrastructure deficiency that you’ve already mentioned.

TERTIA JACOBS: Absolutely, we know that there’s a lot of dynamics behind the scenes as far as the electricity crisis is concerned, but there’s also not certainty because the three ministers all have different dynamics or they all see different solutions to the problem.

So that’s definitely not helping the winter, that’s an issue that’s lying ahead. But otherwise, yes, we need to see more urgency from government, especially in terms of the intensification of the logistics and rail freight crisis as well. We might as well throw in the cholera issue, the lack of water purification, all of that is also playing out in this infrastructure implosion that we are experiencing.

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JEREMY MAGGS: All right Tertia, just a final question then. If we’re on track for a hike, come tomorrow, are there specific sectors or industries that you believe are going to be particularly negatively affected by the decision?

TERTIA JACOBS: Yes, definitely, households, debt servicing costs are going to accelerate, has already accelerated meaningfully, so it’ll continue to weigh on especially durable goods consumption. In July consumers are going to face another massive electricity tariff increase of more than 18%.

So disposable income is becoming more severely affected. We will see it playing out in the construction industry, new building plans are actually tumbling. So the economic environment is becoming increasingly challenging.

JEREMY MAGGS: Teria Jacobs, thank you very much.