South African Reserve Bank Governor Tito Mboweni says the higher-than-expected CPIX (consumer inflation less mortgage costs) at 6,4% year-on-year in May — released on Wednesday morning — would “spoil the party further”.
He indicated in a speech on Wednesday evening that when interest rates were low, many people went on spending sprees as they thought the central bank had declared “a party”.
“Some people might be saying Mr Mboweni is failing as inflation needs to be below 6% — but I say maybe we have been too nice with interest rates being too low,” said Mboweni.
“Inflation today [Wednesday] will spoil the party further. It came in at 6,4% with expectations around 6,2% to 6,3%,” he pointed out.
Mboweni highlighted that South African household debt to disposable income was at a very high 73% — “there is lots of borrowing and debt is rising — now as interest rates are going higher many people are going to find it very difficult — but it is an adjustment process to learn from”.
“We experienced a situation of low inflation and rates coming down. But because people are not used to living in a low interest-rate environment they thought Mr Mboweni had just declared a party here. People went into all kinds of expenditure — some of it was necessary expenditure — then they thought maybe interest rates will go down further and they bought second 4x4s … then people began to use their access bonds for current consumption.
“It was a good idea for someone to be granted a mortgage — which I support fully — but no sooner through revaluation they then had an access bond for another car and other things,” stated Mboweni.
Mboweni added that while the economic growth rate in South Africa was good, a number of challenges remained, with one being to bring down unemployment.
“Switzerland shows that with low inflation and prudent policies one can achieve full employment — this is what the Swiss have,” he pointed out.
“If you have low inflation and credible policies you can have low interest rates as a result,” concluded Mboweni. — I-Net Bridge