Repo rate hike: 75bps biggest increase since 2002

The South African Reserve Bank’s Monetary Policy Committee (MPC) has voted to hike interest rates by 75 basis points, taking the repo rate to 5.50% per annum.

Three members voted for the announced rate, one member favoured a 50 basis point hike, and one member favoured a 100 basis point hike.

The rate hike shocked on the upside compared to many forecasts by economists and analysts this week, where the expected hike was pegged at 50 basis points.

The median expectation of economists in a Bloomberg survey was that the five-member monetary policy committee would vote three in favor of a second consecutive half-point hike, and two for a 75-basis-point increase.

A separate poll showed that 13 of 20 analysts predicted that the MPC would raise the key rate by half a point, with the rest expecting a bigger increase.

According to Reserve Bank governor Lesetja Kganyago, the sizeable hike is due to the current view of inflation risks, and comes a day after Statistics South Africa published the latest headline inflation figure. The inflation rate reached 7.4% in June, the highest level since the global financial crisis and well above the 6% ceiling of the central bank’s target range. The upswing has pushed real rates to the lowest in almost a quarter-century, Bloomberg said.

“While economic growth is slowing globally, inflation continues to surprise to the upside. Sustained policy accommodation, supply shortages and other restrictions have sharply increased the prices of many goods, services and commodities,” Kganyago said.

A higher global oil price and rand weakness contribute to higher expected fuel price inflation for this year at 38.9% (up from 31.2%) and to 4.5% in 2023 (up from -0.3%). Local electricity price inflation is unchanged at 11.0% in 2022, 9.2% in 2023, and 10% in 2024.

As a result of higher global food prices, local food price inflation is also revised up and is now expected to be 7.4% in 2022 (up from 6.6%), and 6.2% in 2023 (up from 5.6%). The food price inflation forecast for 2024 is unchanged at 4.2%.

The bank’s forecast of headline inflation for this year is revised higher to 6.5%, from 5.9%, previously.

Risks to the inflation outlook are on the upside, with the Russian war in Ukraine a key stress point, Kganyago said. “Russia’s war in Ukraine will continue to impair production and trade of a wide range of energy, food and other commodities. The supply of energy to the Euro Area is limited as winter approaches, and is likely to reduce growth this year and next.

“With rapid inflation and withdrawal of policy stimulus, the United States will also experience slower economic growth. China’s recovery from the Covid-19 outbreak and resultant lockdowns remains uncertain. The much-needed resumption of international travel and tourism will take time to generate large benefits,” he said.

“Higher than expected inflation has pushed major central banks to accelerate the normalisation of policy rates, tightening global financial conditions and raising the risk profiles of economies needing foreign capital.”

Despite inflationary pressures, South Africa’s economy has surprised on the upside, Kganyago said. However, he warned that growth remains under pressure.

South Africa’s economic growth for 2022 has been revised upwards to 2.0% from 1.7% in the May meeting. This is due to first-quarter growth surprising on the upside at 1.9% (from projections of 0.9%), the governor said.

“Despite this outcome, flooding in Kwa-Zulu Natal and more extensive load-shedding are expected to result in a contraction of 1.1% in the second quarter. Growth in the third and fourth quarters is forecast to be 0.7% and 0.4%, respectively,” he said.

The economy is forecast to expand by 1.3% in 2023 and by 1.5% in 2024, below the previous projection of 1.9% for both years at the time of the last meeting.

The world’s central bankers are unleashing the most aggressive tightening of monetary policy in decades to cool off surging inflation, Bloomberg reported. For South Africa, it creates the risk of eroding the differential that makes local assets attractive to foreign investors if the central bank doesn’t step up the pace of rate hikes.

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