Tough times loom as the interest rate cycle turns swiftly

With inflationary pressures building up both globally and locally, the SARB monetary policy committee was forced to deliver its first interest rate hike in about three years in its most recent meeting. The hike was anticipated by the market as the forward rate agreements had already steepened ahead of the announcement. What is interesting and perhaps a sign of tough times to come for consumers is that the SARB’s Quarterly Projection Model (QPM) prices a slightly aggressive policy rate lift off-path over the next three years. According to the model shown on the graph below, consumers could see the servicing costs on their bonds and other loans going up by as much as 150 basis points next year.

 

With global supply chain shortages and the energy crisis elevating inflation in both emerging and developed markets, coupled with the vulnerability of the rand, the SARB has hiked interest rates pre-emptively. Uncertainty surrounding the timing and pace of policy normalisation by the US Federal Reserve is likely to persist in 2022 therefore the level of short rates for a vulnerable currency such as the ZAR remains at bay.

Source: South African Reserve Bank (SARB)