South Africa’s inflation outlook has become “complicated” as South Africa is dependant on imported oil and this will place pressure for further rate hikes, say Moody’s Economy.com researchers Dr Ruth Stroppiana and Paul Guest.
“As South Africa is dependent on imported oil, this complicates the inflation outlook. Consumer prices rose 3,9% year-on-year in May and inflation will likely quicken further in June (data are due July 26).
“Although this is still within the tolerance margins of the South African Reserve Bank, it will add pressure for further hikes, particularly in light of rapid domestic growth,” they said Friday.
They added that the higher interest rates already have local businesses on tenterhooks and the higher oil prices recorded on Thursday — this week’s events pushed front-month crude prices to a record high of $78,40 overnight — will hardly help alleviate matters.
“As long as the current tensions continue to drive investor risk aversion, the rand will suffer. With rising local interest rates and still-high gold prices supportive over the medium term, we expect a rand rally, though developments in the Middle East will, for the moment, dictate broader emerging market trends,” said Stroppiana and Guest.
They added that, ultimately, the weaker currency will buoy export growth and boost output, though repricing effects such as these occur with a lag.
“The May gain, which was in line with expectations, reinforces the view that the central bank will carry on tightening. Higher interest rates and a weaker currency will help husband a much-need rebalancing,” they said.
Advice for consumers
Absa’s chief economist Christo Luüs said on Friday morning that recent events indicate the country could be in for another 200 basis-point rate rise in the current tightening cycle. He advised consumers to plan and budget carefully when taking on additional debt.
“Ensure that you will be able to afford future repayments and base your calculations on the assumption that interest rates could rise by even more than a further 1,5 percentage points over the next year. If you experience difficulties in making payments on your mortgage or other debt, talk to your bank forthwith. You may opt to have your repayments restructured over a longer term,” said Luüs.
“If you are uncertain about future interest-rate movements, consider taking a mortgage at an interest rate that will remain fixed for a specific period,” he said.
Referring to the property market (Absa is South Africa’s biggest mortgage lender), he said interest-rate hikes could lead to some cooling down in the residential property market, where prices have roughly doubled since 2003.
“Prospective sellers should therefore prepare themselves for slightly longer waiting periods when selling their property. Small and cheap changes such as improving the garden or security and painting the house can often make the property more sellable,” said Luüs.
“If you think you have missed the opportunity to get an exposure to the property market, you may soon be able to pick up reasonably valued properties if you have funds available or the capacity to borrow. Although house prices are generally not expected to fall, some bargains will evidently present themselves in an upward-moving interest-rate cycle,” he said. — I-Net Bridge