The monetary policy committee (MPC) increased the repo rate by 50 basis points (bps) or 0,5%. The increase will see the repo rate increase to 4.75% per year. This was the third consecutive increment following two 25 bps hikes in November 2021 and in January 2022 respectively.
A hike of as much as 50bps was last seen in 2016 as the Reserve Bank sets in to tackle inflation concerns. Bheki Mkhize, CEO FNB Wealth and Investment solutions explains, “Headline inflation has been forecast higher for this year from 5,8% to 5,9%, amid increasing fuel and food costs. Intertest rates is a key monetary policy tool used by the Reserve Bank to manage inflation.”
For investors and savers, the 50bps increase in the Prime lending rate will have the following impact on asset classes:
Savers, especially senior citizens, would welcome the higher interest rates and fixed deposits will become a more attractive option for them. “Savings instruments linked to the prime lending rate will experience an increase in the interest earned on account of a higher variable interest rate. There will be no immediate change to those individuals with fixed savings instruments, however, individuals looking to utilise fixed savings instruments post 19 May 2021, will see an increase in the rates offered by financial institutions,” says Himal Parbhoo, CEO FNB Cash Investments.
He adds that, “On the back of three consecutive MPC rate increases, South Africans should consider a cash element to their portfolio if already not included. A higher repo rate results in higher income in the form of regular interest payments, which is particularly useful during bouts of market volatility as we are currently experiencing.”
Bond holders will not welcome an increase in the Repo rate. Typically, an increase in the interest rate results in local bonds becoming less attractive to investors, due to higher interest rates offered in cash related instruments. This results in an increase in bond yields and a decrease in bond prices impacting bond holders negatively.
Like cash investments, preference shareholders will see the increase in rates as good news. “Most preference share investments are linked to the prime lending rate, thus an increase in the rate results in higher dividends received, increasing the dividend yield as well as the market value of the asset class,” says Mkhize.
Property companies will not welcome the news of a rate increase. A higher prime lending rate means higher interest paid for a sector that utilises large amounts of debt to grow their balance sheet. The increase in the repo rate will mean higher interest costs thus decreasing net property margins, as well as decrease the market value of properties on balance sheet due to an increase in the discount rate.
An increase in interest rates is generally negative for equity stocks. Higher interest expenses, lower market value of assets as well as a decrease in consumer spending capacity results in negativity for certain sectors in the market. The impact on equity stocks will differ per sector:
Retail and consumer shares would least welcome the news of a rate increase. Higher interest rates impact consumer spending with a reduction in borrowing capacity and reduction in disposable income of consumers. Consumers borrowing less, will result in consumers spending less impacting retail and consumer facing company share prices negatively.
Companies with high debt levels will experience an immediate increase in borrowing expenditure, on account of higher interest expenses on account of a higher variable interest rate. This will have an impact on cash flow of these companies potentially impacting the share price negatively.
Banks and insurers will be positively impacted by interest rate increases. For both industries interest rates are a key driver for margins and an increase in the rate will be positive.
The 50bps increase in the Repo rate will have an impact on both South African savers and investors. The Reserve Bank is set to increase the Repo rate further in future by 25bps per meeting, until reaching a total rate of 6% by the third quarter of next year. “Covid-19 as well as the Ukrainian war have all had an impact on markets and increasing global inflation. As an investor and saver, it is important to understand how the increase in rates will impact various asset classes, and plan accordingly regarding asset classes that should be considered in a portfolio taking into account interest rate increases,” concludes Mkhize.
Article credit https://egolijozinews.co.za/how-the-recent-interest-rate-increase-impacts-your-asset-classes/