The record low interest rates have led to a significant rise in property purchases in South Africa with more middle-class earners being able to afford and qualify for bonds.
But with the new year around the corner, many economists have predicted a rise in interests rates.
South Africa Economic Outlook October 2021, here is what South Africans can expect in 2022:
According to the PwC South Africa Strategy & Economics team, double-digit inflation on administered prices during September 2021 while headline reading remains on target. In July, consumer price inflation increased from 4.6% to 4.9% in August and 5.0% in September. Housing, utilities and transport combined contributed 2.4 percentage points to September’s headline reading. Administered prices – accounting for 16.2% of the benchmark consumer basket – are set by public sector entities (like municipalities) and include costs like water and electricity rates, fuel, and vehicle license and registration fees, amongst other components.
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Most recently, inflation on administered prices was 10.4%, while inflation excluding this component was measured at just 3.8%. In addition, electricity and other household fuels were 14.0% more expensive in August following the annual tariff adjustments in July. As a result, administered prices have for a long time seen higher cost inflation (an average of 6.6% per annum since 2008) compared to the headline increase (5.1% per annum) in the overall consumer basket.
2022 Interest Rates Predictions
Despite upside risks to inflation, South Africans can expect interest rates to remain on hold until the first quarter of 2022. Following its latest meeting, the South African Reserve Bank (SARB) Monetary Policy Committee (MPC) commented on September 23 that policymakers again decided (unanimously, for the fourth meeting in a row) to keep lending rates on hold. The central bank’s quarterly average inflation forecasts see headline inflation remaining near the mid-point of the 3%-6% target range over the medium term, peaking at a mean of 5.0% during the fourth quarter of 2021.
Nonetheless, the MPC noted upside risks in the short time, including higher international producer and food price inflation, greater volatility in global oil prices, as well as domestic price adjustments in electricity and other administered prices. The SARB projects a 13.4% increase (in US dollars terms) in international food prices during 2021 and a 48.3% rise in non-oil commodity prices. The central bank expects domestic electricity prices to increase by 11.8% in 2022 and 10.0% in 2023, compared to the average headline inflation of only 4.3% over the two years. South Africa Economic Outlook October 2021 SARB QRM suggests interest rates could start rising in November already – but this is just a guidance tool.
The central bank’s latest forward guidance suggests that interest rates increase by 25 basis points when the MPC meets again in November. This will be the start of monetary policy normalisation that, according to the QRM, should take the repo rate to 5.17% by the end of next year and more than 6.36% by the close of 2023. Based on this guidance, the repo rate could be back to its pre-pandemic level (6.50%) by the middle of 2024 if the QRM is followed religiously. However, as the MPC regularly emphasises, the QPM is not a strong determinant of interest rates but a ‘broad policy guide’ used as one of the tools at their disposal to guide monetary policy decisions. As such, policymakers can deviate from the projected interest rate patch – this is clear in the variety of interest rate scenarios suggested by the MPC interest rate forecast fan. Indeed, the MPC decided against QRM recommendations for a start to monetary policy normalisation in the third quarter of 2021.
Economists maintained for some time the view that interest rates will not increase until the first quarter of 2021. While the QRM is pointing to the need for a rate hike in November, it is essential to note that the five MPC members voted unanimously in September to keep the repo rate on hold – this was the fourth-straight unanimous vote. Even with growing upside risk to the short-term inflation outlook, it is unlikely that three policymakers will change their stance by the November 16-18 MPC meeting to swing the vote towards a 3:2 split needed to lift lending rates. As such, economists envisage a start to monetary policy normalisation in either January or March 2022 and for lending rates to rise at a more moderate pace than the SARB’s current forward guidance. The current projection is for a level of 5.00% by the end of 2023 – implying six hikes of 25 basis points each over the next two years. This quantum could increase if the MPC implements a succession of rate hikes in 2022, as currently suggested by its modelling.