Raising rates will harm economy, Reserve Bank is warned

An interest rate hike next week is undesirable as it will threaten a further slowdown in consumer spending, which is a major driver of SA’s economic growth, an economist warned on Wednesday.

Saijil Singh, economist at international credit insurer Coface, said anything that curbed consumer spending would hurt growth. "To go and put in a measure that is going to restrict consumer spend is only going to affect GDP (gross domestic product) immediately. So in my opinion it would not be wise to have an interest rate hike at the moment."

Coface provides risk management and protection from bad-debt losses for its clients.

The Reserve Bank’s monetary policy committee will hold its last meeting of the year next week.

The consensus among economists is that rates will be kept on hold. But some economists are not ruling out a rate increase of 25 basis points.

Mr Singh said that the economic environment would get better over the next year and a half but that the improvement was not going to be significant. SA needed to improve economic growth and boost confidence levels to attract more foreign direct investment, which as a percentage of GDP is low compared with the country’s peers.

Mr Singh’s comments coincided with the release yesterday of retail sales figures for September that showed modest growth, suggesting that retailers are in line for yet another festive season characterised by muted activity.

Household disposable incomes are being eroded by high inflation, rising interest rates and high administered prices.

Retail sales — an important indicator of consumer spending — rose 2.3% in September compared with a year ago. In August, they rose 2% year-on-year, according to Statistics SA figures. Sales had been expected to rise 3%. The data showed that general dealers and retailers in hardware, paint and glass were unsurprisingly behind the rise in retail sales.

Higher sales by general dealers may be explained by consumers moving towards cheaper items.

Also on Wednesday, an index by the University of SA’s Bureau of Market Research and credit management firm MBD showed that 73% of 3,900 consumers in a survey were not satisfied with their financial situations in the third quarter, amid rising debt-servicing costs.

Old Mutual Investment Group chief economist Rian le Roux said the Reserve Bank would probably leave interest rates unchanged — mainly as a result of lower inflation and oil prices, and a narrower trade deficit in September.

Interest rates were raised 25 basis points in July and 50 basis points in January.

Investec chief economist Annabel Bishop said that food, beverages, household consumer goods, tobacco, pharmaceutical products, semidurable goods, clothing, footwear, household textiles, and recreational and entertainment goods retailers were most likely to feel a slowdown in consumer spending in the new year.