The South African Reserve Bank’s Monetary Policy Committee (MPC) has hiked the repurchase rate (repo rate) by 75 basis points.
The increase means that the repo rate will now be 6.25% per year from 23 September 2022, with prime now at 9.75%.
The MPC made the decision during its meeting on Wednesday. This was the fifth consecutive increment following a two 25 basis points hike in November and in January. The repo rate was hiked by 50 basis points at the May meeting. The MPC upped the ante with a 75 basis point rise at its July meeting.
Addressing media on Thursday, Reserve Bank Governor Lesetja Kganyago said three members of the MPC preferred the announced increase.
- Advertisement -
“Two members preferred a 100 basis points increase,” he said.
While the vote split indicates a more hawkish bias among the panellists, the benchmark is now close to 6.36% — the implied year-end 2023 rate according to the bank’s quarterly projection model, Bloomberg reported.
Kganyago stressed that the model is just a broad policy guide, but it does signal the committee is front-loading its fight against inflation, and there may be room to cool the hiking cycle, it said.
The central bank wants to more firmly anchor inflation expectations close to the 4.5% midpoint of its target range and “to increase confidence of hitting the inflation target in 2024,” Kganyago said.
- Advertisement -
“If inflation continues to moderate, then the South African Reserve Bank should be able to slow the pace of hiking, but much depends on what the Fed will do during the rest of the year,” said Carmen Nel, an economist and macroeconomic strategist at Matrix Fund Managers.
“We would expect a 50-basis-points hike in November, but with the balance of risks tipping toward 25 basis points rather than 75 basis points if the rand stabilizes.”
FNB CEO, Jacques Celliers, said: “We are witnessing a concerted effort by the South African Reserve Bank and numerous other central banks around the world to mitigate the effects of higher inflation. Although the effects of these actions may appear to be negative for consumers, the effects of escalating inflation are significantly more severe.
- Advertisement -
“This is an ideal time for consumers and businesses to take advantage of higher investment rates and minimise consumption-driven credit usage.”
He noted that the recent FNB/BER Consumer Confidence Index revealed a slight increase in consumer confidence in South Africa, and consumers have also experienced some relief due to decreases in fuel prices. “However, South Africa must act swiftly to address issues such as the intermittent power supply, which continues to derail the country’s economic growth prospects,” said Celliers.
FNB chief economist, Mamello Matikinca-Ngwenya, said: “As expected, the Monetary Policy Committee continued with aggressive policy rate hikes… This was in line with our and the Bloomberg consensus expectations. The aggressive rate increase came despite the economy declining by 0.7% q/q in 2Q22 and reflects the MPC’s drive to contain inflation expectations over the medium-term.
“We expect the Reserve Bank to increase the repo rate by 50bps at the November MPC meeting, pushing it to 6.75%, the level where we think the policy rate will peak before falling in early 2024.
“The continuation of aggressive rate increases is partly underpinned by aggressively tightening global financial conditions, the weaker domestic currency and domestic wage pressures as workers demand higher wages to compensate for the higher cost of living,” said Matikinca-Ngwenya.
EY Africa chief economist, Angelika Goliger, said that although inflation has come off the boil slightly, dropping to 7.6% in August, it remains high. “It will likely be elevated for some time as firms try to make up in margins, and recover the difference between consumer and producer prices – which reached 18.0% in July.”
The economist said that the SARB, along with the rest of the world, will be watching the US Fed closely, whose most recent dot plot shows aggressive tightening for the remainder of the year, pricing in 125 bps increase by December 2022.
“So we can expect further rate increases at the last two MPC meetings for the year, perhaps at a similar pace of the US Fed, if inflation does not cool markedly. This will add further pressure on consumers in the near term while it takes time for the higher interest rates to temper inflation.
Following the South African Reserve Bank’s (SARB’s) decision to increase its repo rate by 0.75%, FNB will raise its prime lending rate by 0.75%. The prime rate-linked interest rates will be adjusted from Friday 23 September 2022.
In his address, the Reserve Bank Governor characterised the global economy as entering a period of persistently high inflation and weaker economic growth, noted Reza Hendrickse, portfolio manager at PPS Investments.
The SARB’s forecast for global growth has been revised downwards to 3.0% in 2022 and 2.0% in 2023 – compared to 3.3% and 2.5%, respectively, at the July meeting, Hendrickse said.
The SARB has also revised lower its forecast for South African growth to 1.9% in 2022 – compared to 2.0% previously – but revised higher its projections for 2023 and 2024.
“Load shedding, the weaker global macro environment and geopolitical risks are expected to remain headwinds to growth, but the trend in household spending and investment are more constructive.”
Frank Blackmore, lead economist at KPMG, said that with the depreciation of the rand, it is unlikely that inflation, especially of imported goods such as fuel, will fall by much any time soon. “Besides for fuel, inflation is still being driven by food and energy more broadly.”
Investec economist, Tertia Jacobs, said: “The inflation forecast for 2023, interestingly, was revised down with both headline and core forecasts revised from 5.7% (P: 5.7%) and 5.4% (P5.6%).
“However, the balance of risks to the forecast remains to the upside. And this probably contributed to the hawkishness in view of a high level of uncertainty as to the persistence of higher inflation in the future. Added to this is that many international Central Banks are normalising monetary policy at a faster pace, with the Fed setting the tone, dealing more aggressively with inflation.”
Read: How much more you will pay on your bond after South Africa’s latest interest rate hike