Inflation eating into savings after last year’s slew of interest rate cuts

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There are pros and cons to low interest rates; among the latter is the fact that people who have savings banked in South Africa today are losing about 1% of their value. The currently ultra low rates effectively mean that savers are becoming poorer, economist Mike Schussler said on Wednesday, after Statistics South Africa released data showing annual consumer inflation stayed relatively high at 4.6% in July, compared with 4.9% in June.

The inflation numbers are expected to put more pressure on the Reserve Bank to raise the repo rate at which it lends to commercial banks from a historically low 3.5%. 

Balancing the low interest rate benefits to the economy with the effect of inflation is becoming harder for the central bank, Schussler said.

“There is a case to be made that the economy hasn’t fully recovered. And I agree. But it needs a fine balance because everybody expected inflation to jump up from last year’s low base impact and start heading down,” he said.

“But the heading down is taking its time. And we’re also seeing that inflation is a lot higher, So once that starts happening, then it looks like we’re losing the inflation battle.”

The South African Reserve Bank uses interest rates to pursue its mandate of keeping inflation within a 3% to 6% target range, while also taking the economy into account. The bank cut rates by 275 basis points in 2020 to offer economic relief in response to the devastating Covid-19 pandemic. 

In July food, oil and fats, and fuel prices combined with a weaker rand to push up the cost of living significantly. 

The cost of electricity jumped 13.6% on an annual basis. According to Agri SA economist Kulani Siweya, input costs also remain high and pose a risk to profitability to farmers after fuel prices increased by 1.7% in July, taking the annual rate to 15.2%.

The central bank’s projected interest rate path suggests an increase of 25 basis points in the fourth quarter of 2021 and in each quarter of 2022. 

How South Africa recovers from recent droughts is expected to remain a factor affecting local food prices. 

The country entered another drought state of disaster in July because of several years of low rainfall in parts of the Northern, Western and Eastern Cape provinces. 

Agri SA said that ​​assistance was urgently needed to “stabilise local economies and preserve what is left of core breeding herds”.

On Wednesday, Statistics South Africa said food inflation was unchanged at 6.7% in July, but remained elevated, because of pressure from prices for meat and the oils and fats category. 

“The global higher food prices have also majorly underpinned price escalation on the domestic front, owing to various factors that include growing demand in China and unfavourable production conditions in North America and parts of Europe,” Siweya said. 

The data release shows that although water charges increased by 7% compared with 9.9% last year, hikes for electricity and assessment rates were higher than in 2020. 

The year-on-year rate of increase in the price of fuel was at 15.2%, compared with June’s reading of 27.5%. 

Inflation for oil and fats also continues to escalate, according to the statistical body, reaching an annual rate of 2.4%, the highest in almost 10 years. 

Prices for alcoholic beverages rose 1.7% between June and July, the highest increase since March 2019. Wine drinkers are paying a sharp 3.8% more, which is driving inflation in that category.