THE South African Reserve Bank (SARB) yesterday delivered a shocking increase in the repo rate in a bid to curb supply-drive inflation and the depreciating rand – the biggest hike in borrowing costs in almost two decades.
Consumers will have to tighten their belts further as they will be paying more on their monthly credit instalments. This, after being dealt a double whammy of elevated inflation and interest rates.
Borrowing costs in South Africa have risen the highest since February 2020 due to rising prices of everyday goods which have been pushed higher by the ongoing war in Ukraine.
The SARB’s Monetary Policy Committee (MPC) increased its benchmark interest rates for a fifth time in a row since November 2021, this time by 75 basis points to 5.5% per annum.
This was the biggest hike in borrowing costs in since September 2002 when the repo rate was increased by 100 basis points amid a crisis in emerging markets.
This means that the prime lending rate will increase to 9%.
However, the SARB has started toying with the idea of a full 1% hike as the risks to the inflation outlook were assessed to the upside.
The bank was pushed to a hawkish stance on its ongoing hiking cycle after inflation broke the upper limit of the bank’s 3-6% target band for the second consecutive month in June.
SARB governor Lesetja Kganyago said that one member of the MPC preferred a 50 basis point increase, three preferred the announced increase while one member preferred a 100 basis points increase.
However, Kganyago said the revised repurchase rate path remained supportive of credit demand in the near term while raising rates to levels consistent with the current view of inflation risks.
“The aim of the policy is to stabilise inflation expectations more firmly around the mid-point of the target band and to increase confidence of hitting the inflation target in 2024,” he said.
“Guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future.”
Higher-than-expected inflation has pushed major central banks to accelerate the normalisation of global policy rates by raising benchmark rates because of elevated global energy and food prices.
The SARB also warned that Russia’s war in Ukraine was likely to persist for the rest of this year and might have significant further effects on global prices.
Oxford Economics head of macroeconomics, Jacques Nel, said they expected further tightening this year.
Nel said the latest increase suggested the MPC aimed to front-load policy tightening with the hope that more anchored inflation expectations will limit the extent to which interest rates would eventually be increased.
“Such hikes discourage spending, as they are meant to, and the resulting impact on activity and formal employment will be dire on a continent where joblessness is already high,” Nel said.
South Africa’s consumer inflation quickened to 7.4% in June from 6.5% in May, the highest in 13 years.
The SARB revised upwards its forecast of headline inflation for this year from 5.9% to 6.5%, saying inflation was expected to remain above the target range until the fourth quarter of 2024, with core inflation forecast higher at 4.3% from 3.9% this year.
The risk is higher inflation expectations become entrenched, driving up wage demands, resulting in a wage-price spiral.
North-West University Business School economist Professor Raymond Parsons said there were also external and internal reasons to expect that the rate of inflation was likely to peak soon and then decline towards the end of 2022.
“With the MPC’s growing concern about the emergence of ‘second-round effects’ of inflation it was unavoidable that a further increase in borrowing costs for business and consumers would now have to be implemented,” Parsons said.
The SARB revised upwards its economic growth forecast from 1.7% percent to 2% this year, despite disruption in activity due to flooding in KwaZulu-Natal and more extensive loadshedding.
However, expected growth for 2023 and 2024 was revised significantly lower to 1.3% and 1.5%, respectively, below the previous projection of 1.9% for both years.
BUSINESS REPORT