The South African Reserve Bank (SARB) has left the door open for another large interest rate hike in November as the growing number of the Monetary Policy Committee (MPC) members are toying with a 100 basis points increase on the back of elevated inflation.
The SARB yesterday dealt another blow to struggling consumers and increased the repurchase rate (repo rate) by 75 basis points for the second time in a row as risks to inflation are assessed on the upside as Russia’s war in the Ukraine continued with adverse effects on global prices.
As a result, the repo rate will rise from 5.5% to 6.25% per year, also lifting the prime lending rate at 9.75%, meaning that homeowners will have to adjust to higher home loan repayments.
The SARB decision followed hot on the heels of the US Federal Reserve which hiked rates by another 75 basis points and maintained a clear hawkish stance, stating it anticipated that ongoing increases will be appropriate.
SARB Governor Lesetja Kganyago said three members of the MPC preferred the announced 75 basis points increase, while two members preferred a 100 basis points increase.
In July only one member of the MPC preferred a 100 basis points hike when the central bank delivered a shocking 75 basis points increase, the biggest in more than six years.
The level of the interest rates is now closer to the level prevailing before the start of the Covid-19 pandemic in 2020.
Kganyago characterised the global economy as entering a period of persistently high inflation and weaker economic growth.
He said the revised rate path remained supportive of credit demand in the near term, while raising rates to levels more consistent with the current view of inflation risks.
“The case for why rates could have gone 100 basis points or why they have gone 75 basis points is the consensus view of the economy in terms of this committee, in terms of our take on the balance of risks,” Kganyago said.
“Members might then prefer that maybe we should be acting faster and members might say that we act now or we will act later, but what you have in this statement is the collective view of this.
“What does that mean for future rates? When you come in November, you will know what it means for future rates.”
FNB chief economist Mamello Matikinca-Ngwenya noted that the aggressive rate increase came despite the economy declining by 0.7% in the second quarter.
Matikinca-Ngwenya said the decision reflected the MPC’s drive to contain inflation expectations over the medium-term.
“We expect the Reserve Bank to increase the repo rate by 50 basis points 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.”
Kganyago said the aim of monetary policy was to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of hitting the inflation target in 2024.
Headline inflation eased to 7.6% in August from 7.8% in July due to slowing fuel prices though prices for food and non-alcoholic beverages continued upwards.
The bank’s forecast of headline inflation for this year was unchanged at 6.5%, above the upper limit of the SARB’s target range of 3-6%, while core inflation forecast was also unchanged at 4.3%.
The bank revised downwards slightly its economic growth forecast from 2% to 1.9%, mainly due to flooding in KwaZulu- Natal and more extensive load shedding.
However, the economy is forecast to expand by 1.4% in 2023 and by 1.7% in 2024, above previous projections.
Matrix Fund Managers economist and macro strategist Carmen Nel said the policy decision seemed to be driven largely by the numerous risk factors facing the economy given the downside risks to domestic growth and margin improvement in the inflation outlook.
“Hence, we cannot ignore the key role that developed market central banks are playing in the domestic policy setting,” Nel said.
“If Fed Chair Jerome Powell slows the pace of hikes, then this would give the SARB room to slow, or even pause the hiking cycle.”