Discount rate hike projected for September, new homeowners must brace themselves

By Sifiso Sibandze

Another interest rate hike looms for emaSwati and it is expected to put more strain on those who are still repaying their housing and car loans. The next announcement by the Central Bank of Eswatini’s (CBE) Monetary Policy Consultative Committee (MPCC) will be on September 23 and some seasoned economists who spoke to Eswatini Financial Times on condition of anonymity are of the view that the rates could increase by as much as 0.5 per cent. The economists said they were basing their predictions on the projected increase of the South African Reserve Bank’s Monetary Policy Committee (MPC).

The MPC is expected to increase its repo rate by 0.5 per cent or more. Based on the link of the Eswatini Economy to that of South Africa, the MPCC usually decides to hike rates or to leave them unchanged depending on what the MPC decides about its monetary policy. 

For Instance, the South African Reserve Bank’s MPC hiked the repo rate by 75 basis points to 5.5 per cent on Thursday in July and Eswatini bank followed suit, increasing its discount rate by 50 basis points from 4.5 per cent to 5.0 per cent 

If the Central Bank increases the discount rate by another 50 basis points, the prime lending rate is going to climb to 9.0 per cent. Economists told Eswatini Financial Times that new homeowners who purchased the properties while the interest rates were low may struggle.    

The Central Bank has warned over a ‘second round’ threat to inflation in Eswatini which automatically signals frequent increases in borrowing costs.

The projected runaway inflation has been fully attributed by the CBE to the uncertainty of the Russia-Ukraine war which has ramifications for commodity prices and economic growth.

The Bank has revised upwards its short-to-medium term forecasts reflecting persistent inflationary pressures. The bank has observed that actual average inflation for the second quarter of 2022 came out high reflecting stronger upward pressures. 

“The bank’s assessment of the overall risks to the inflation outlook continues to show that they are skewed to the upside thus suggesting an upward trend in the inflation forecasts for the forecast period. Inflation is forecasted to remain elevated due to: the expected further increase in South Africa’s and domestic fuel prices due to the extended Russia-Ukraine war which continues to suppress global Brent Crude Oil supplies. Also, the supply of other inputs such as fertilizer and wheat has been put under pressure due to the war. As a result, food prices are also expected to remain elevated due to the persistent high input costs,” the bank said.

Now, with inflation climbing and projected to continue soaring, the Central Bank will tighten its monetary policy very gradually to avoid an unmooring of inflation and damaging its credibility. 

Economists describe inflation as the result of too much money chasing a few goods. Over the last several months, this has occurred amid a surge in demand and supply chain disruptions worsened by Russia’s invasion of Ukraine. 

To combat inflation, the Central Bank raised its policy rate in May and also in July. This is the rate they charge commercial banks for loans or pay commercial banks for deposits. Commercial banks pass a portion of these rates to their customers by increasing the prime rate. Increasing the prime rate increases the costs of borrowing which subsequently reduces the purchasing power of businesses and consumers. For example, it becomes more expensive to borrow money for a house or a car.

Ultimately, the interest rate hikes act to slow spending and encourage saving. This motivates companies to increase prices at a slower rate, or lower prices, to stimulate demand. 

Moreover, higher inflation in South Africa which is mainly transmitted via the import of finished goods is expected to influence domestic inflation to the upside. “These risks are, however, counteracted by the expected stronger Rand and the dissipating effects of COVID-19 as measures to recover from the pandemic continue to be put in place, especially in the short-term.”

 As a result, the annual average inflation forecast for 2022 is revised up to 4.38 per cent, from the 4.10 per cent forecast in May 2022. The third quarter of 2022 is also revised up to 4.92 per cent (from 4.35 per cent) and the fourth quarter of 2022 to 4.98 per cent (from 4.48 per cent).

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *