Inflation Shock Set To Push Up Interest Rates

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Higher Than Expected Inflation Will Eventually Push Up Interest Rates

One of the few reliefs that South African credit users and consumers have been able to enjoy during the worldwide economic crash caused by Covid-19 has been lower interest rates.

This has provided a small measure of relief to those paying off credit accounts. Since around half of all credit users locally are many months behind on debt repayments, any and all help has been most welcome.

‘rates have dropped to historic lows’

In fact, rates have dropped to historic lows, only fitting for such historic and economically crushing times.

Higher Rates To Come?

The release of recent inflation figures has now caused concern among economists who predict things may start to change.

Inflation is always a factor and is to be expected. It is “normal“. The key is that the rate at which it happens is reasonable and doesn’t jump too much too quickly. If a loaf of bread suddenly doubles in price in only a few weeks or months then a country’s economy is doomed.

recently released inflation figures were a lot higher than people…expected

Though not as bad as that (not nearly), recently released inflation figures were a lot higher than people (including the SA Reserve Bank) expected. The rate is now the highest it has been in the last 14 months at 4.4%. What had been expected or rather hoped for was less than 3.5% (a figure the SARB like to see).

Is 4/4% Inflation A Lot?

4.4% is high, especially considering that just a month earlier it had been only  3.2%.

It is now likely that in reaction to this we can expect that there will be an interest rate hike of the Repo Rate in the not too distant future (probably around 50 base points or half a percent by the end of the year at least).

Not Yet..But Soon?

In May 2021, the SA Reserve Bank MPC decided to leave the interest rates unchanged (much to consumer’s relief) but things are going to have to change if there are not more positive factors that come into play over the next few weeks and months.

REPO RATE: 3.5%

What remains to be seen is how well the Rand now performs against currencies like the Dollar which could hold out the prospect of the rates not changing too soon. Recently the currency has performed well. Some international ratings agencies have also not recently updated their ratings of SA and that has ironically helped a little as well (not as well as getting out of “junk” status would, of course). A number of other factors will come into play but it looks like the golden days of rock bottom interest rates may soon be moving towards an end.