The news on the inflation front may not be good, but there is no immediate reason for Reserve Bank Governor Tito Mboweni to activate his itchy trigger finger.
Inflation is on the up and levels of indebtedness are at an all-time high, at least measured by one influential economic research body, but incomes have also been increasing and there is every likelihood that households can meet increased interest commitments.
Household debt as a percentage of income is at the highest it has been in the past 24 years at 68,2%, according to the Bureau of Economic Research (BER).
But BER economist Christelle Swanepoel says that the situation is “not critical” because statistics do not show consumers increasingly using their disposable income to meet interest bills.
Because incomes are rising, consumers are continuing to spend and borrow relatively comfortably. This is reflected in the relatively stable interest to income ratio of 7,2% for the first quarter of this year.
This indicator may have increased from 6,5% in the first quarter of 2005 but it has been safely within the region of 8% over the past few years.
While the BER anticipates that the Reserve Bank will hike rates by another half a percentage point, Swanepoel maintains that consumer spending may be more robust to interest rate increases than perceived because of “current rather buoyant income conditions”.
The word from the ombudsman for banking services, however, is that heavily indebted consumers suffered after the last interest-rate hike.
The ombudsman reported a surge of complaints from bank consumers who have run into financial trouble after taking up unsolicited offers of credit.
This trend might reflect banks seeking to increase their client base before the National Credit Act comes into force in June 2007 because of its tough penalties for reckless lending.
John Simpson, the complaints investigation manager for the banking ombudsman, added that consumers appear to be over-estimating their income and underestimating their expenditure to get credit or extend credit.
The result is that more consumers appear to be over-indebted and Simpson reported that, “some borrowers were flying so close to the wind that the recent half-a-percentage point rate hike was sufficient to capsize them”.
There may be disagreement over whether consumers will continue spending in the face of interest-rate hikes or be capsized because of high-debt ratios, but most economists predict that rates are likely to increase again when the monetary policy committee meets on August 1 and 2.
“When you consider the justification for raising rates in the last meeting, nothing has really improved,” said Nedbank’s chief economist Dennis Dykes.
Last month, May’s inflation figures were 3,9% for the consumer price index (CPI) and 4,1% for consumer price index excluding interest rates on mortgage bonds (CPIX) . The Reserve Bank hiked its key repo rate by half a percentage point to 7,50%, the first time it has revised the rate upward since September 2002.
Statistics South Africa announced this week that both the CPI and the CPIX have risen by 4,9% year-on-year for June 2006.
Consensus forecasts from a Reuters poll predicted a 4,8% rise in CPIX and a 4,85% rise in CPI.
Dykes said that the rise in inflation was driven by energy and food prices.
Transport inflation was up by 8,8% in June compared with 5,4% in May this year. The CPI for food was 6,7% in June and 5,7% in May while the housing CPI rose from 2,4% in May to 3,9% in June.