It is a serious question: how badly does a SARB interest rate hike hit our SA households? Impacting disposable income. Shifting buying power away from consumer businesses towards bank depositors (favoured by higher interest income)?
Although households do save a little by way of keeping deposits in banks, the overwhelming funding of banks comes from institutions & businesses. Thus an interest rate increase primarily comes at the expense of borrowers (some of which are households, especially via mortgages, credit card & car financing) who pay more interest, but who don’t benefit from higher interest earned, and now have less disposable income for other purchases.
Thus households and retailers, cell phone providers, motor dealers, insurance companies and entertainment providers generally would like to know what the impact of a modern interest rate hike, and an interest rate hiking cycle, is on their lifestyles & their businesses.
For those without debt (there are such people), the impact is zero and for those without debt and some savings in the bank it is a net income gain.
For the many indebted, the net income loss depends entirely on the level of their indebtedness, whether their debts amount to 10% of annual income, 50% or even 200%. Every case is unique.
But we can analyse the country overall, and compare it with competing shocks.
It turns out a modern interest rate hike is a minor affair, and with luck even an entire interest rate cycle could have only a limited impact, compared with past events, and alternative shock scenarios.
SA households currently hold R1.5 trill in debt from monetary institutions. A 0.25% SARB interest rate hike therefore puts indebted households back by R3.7bn annually.
That sounds big but isn’t really, relatively speaking. So far in this rate hike cycle, SARB has raised by 0.75% (the repo rate rising to 6%). A normal repo rate would be expected to be 1%-2% real, but we are in an extremely weak economy, our inflation expectations stable & well anchored & SARB far from fully normalising its policy stance (as in the case of the US at least three years away, and longer still in Europe).
Comments by the SARB Governor made overseas last week suggested policy to be on hold for now, effectively keeping watch over inflation expectations, and thus the Rand and what moves it (currently mainly Fed liftoff scenarios).
On this basis, SA may still encounter one 0.25% rate rise by early next year (after which things get very hazy through 2018, but don’t assume anything about SARB being “done”).
So that suggests another potential R3.7bn annualised hit to SA households by March 2016 (if SARB were to match the Fed liftoff, were it to happen), for a total charge of some R15bn annualised since SARB started its tightening cycle in 2013.
That sounds bad but is it?
Average SARB rate hiking cycles since the 1970s involved rate increases of at least 4%-5% on average, and in two instances moving as much as 8%-12%.
Want to do the arithmetic? On today’s household debt, a 5% rate hiking cycle would impose an annualised R75bn interest burden increase at the peak of the cycle compared to the trough, and as much as R180bn in the case of a 12% hiking cycle.
You will admit that would be rough, were it to happen again.
In contrast, the VAT budget with a 14% tariff collects over R300bn in taxes. Simplified some R22bn per 1%. Some of this is contributed by businesses, much of it by households. With most business taxes in any case “passed on” to final buyers through pricing mechanisms, the direct & indirect impact on households isn’t much less than R20bn annualised in time.
And this again feeding into the inflation-plus semi-indexed wage demands, in a never ending loop.
So now you know. The entire SARB rate hiking cycle through Easter 2016 will probably will have lifted only three-quarters of what Finance Minister Nene will do in Feb when he lifts VAT by 1% to 15% (alternatively hits us in other ways if a VAT hike proves politically indigestible in an election year, according to Zuma decided by the country branches).
Obviously, interest rate hikes hit households differently from VAT increases, being differently spread, but it is the overall effect that we are interested in.
There is yet another rogue to bear in mind: monthly petrol & oil price changes hitting households (and businesses, and these as in the case of interest rates inclined to passing things on).
The total petrol & diesel consumption is about 24 billion liters annually. A 50 cents monthly change in price (up) can put households back by R12bn (annualised, and taking into account direct & indirect effects over time).
With such leaps possible monthly for four months in a row (once Saudi awakes from its dream state, or alternatively Yellen’s Fed finally starts liftoff, sinking the Rand some more), you could end up with petrol & diesel R2/l more expensive in a jiffy, and households poorer by R50bn annualised.
Our poor old SARB comes out as the comparative innocent here, with its R3.7bn hit once in a blue moon when it raises interest rates by 0.25%, as has so far happened in this raising cycle (but not for a moment forgetting the SARB’s Darth Vader reputation when going by distant cycle memories).
Of course, paw-paw really hits the fan if Yellen lifts off, Saudi awakes, Rand sinks, SARB raises & Nene hikes. Annualised, that’s worth how much in 2016: R3.7bn + R50bn + R20bn = R75bn, depending on your assumptions.
But SARB would be a fraction of that, and even Nene would be the comparative innocent. The real dragons reside elsewhere.
On R2 trill of SA disposable income, a SARB rate hike takes away 0.2%. And Nene would be equivalent to 1%. It is the petrol & diesel that worries me more.
To which worries we can add further Eskom surcharges demanded & granted in the coming year. And if Mother Nature keeps going seriously wrong on us, and we are in the throes of a devastating interior drought this summer, add massive food price escalations to the bill as well.
All these features will impoverish our households, which as a group won’t sit on their hands, demanding excess inflation & real income loss compensation in coming salary rounds. Businesses in turn will pass this on via yet higher prices, to the extent they have control over pricing. Commodity exporters clearly do not, being price takers. But the rest will try to the extent they can, and otherwise keep their wage bills trimmed via job shedding & other cost reductions, keeping nominal income from escalating, and allowing real income to decay.
That’s the real challenge awaiting the SARB’s monetary policy. And households and their retail suppliers. It is a complex prospect.