The case for a lower repo rate strengthens

By Dr Roelof Botha, Economic Advisor to the Optimum Group

Trends for three key indicators were published this week that collectively strengthen the case for a lowering of the Reserve Bank’s repo rate, which will automatically impact the prime overdraft rate of the commercial banks.

First and foremost was the consumer price index (CPI) data for March, which recorded a welcome decline from 5.6% to 5.3%. As predicted in this column (on 27 March), the food price index has continued its decline and was the main reason for the drop in the overall rate of consumer inflation in March.

Food & beverages comprise more than 21% of the weighting of the CPI basket and the annualised price changes of these two groups declined from 12.5% in March 2023 to just above 6% in February and is now at a level of marginally less than 5%. This downward trend was also anticipated by the Agricultural Business Chamber (Agbiz) and is likely to persist for several months.

South Africa’s retail trade sales data for February was also published by Statistics SA this week and did not make for good reading, with another month of decline in the real sales value. Although the year-on-year real growth rate for the three months between December 2023 to February 2024 increased by 0.5%, this figure lags behind the country’s average annual population growth rate over the past eleven years of 1.7%.

A third indicator of the continued pressure on household finances was contained in the latest Altron FinTech Household Resilience Index (AFHRI). Although the overall trend seems to have bottomed out, the marginal year-on-year recovery of 1.4% in the fourth quarter of 2023 was mainly related to a welcome increase in real levels of labour remuneration in the private sector.

Exhibit 1 | Altron Fintech Household Resilience Index (AFHRI) Q4 2023

According to Johan Gellatly, Managing Director of Altron FinTech, the trend of the AFHRI since 2022 represents just one of several key indicators that confirm the pressure on household disposable incomes, mainly due to the highest interest rates in 14 years. He believes that restrictive monetary policy when demand inflation is nowhere to be seen, is not conducive to new capital formation by the business sector, which serves to hamper job creation.

Arguably the most worrying trend in the latest AFHRI is the year-on-year decline of more than 11% in the ratio of household income to debt costs. In the fourth quarter of 2021, which was the start of the MPC’s restrictive monetary policy stance, households were sacrificing 6.7% of their disposable incomes to pay debt costs. This burden has now moved to 9% – an increase of more than 34%.

Several positive trends were nevertheless identified by the latest AFHRI, including the following:

  • Since the third quarter of 2021, private sector employment has risen by almost 1.7 million, of which 243,000 new jobs were in the construction sector – a sign of renewed business confidence and increased private sector investment.
  • The year-on-year real increase in the value of unit trust assets is welcomed and has played its part in securing an increase in the ratio between household wealth and household income.