50 bps increase in repo rate was expected, but shocking nonetheless

Thursday’s 50 basis points increase in the repo rate was not completely unexpected, considering tolling blackouts still loom over interest rates, which continues to contribute to a higher inflation rate, and no economic growth is possible without consistent power supply.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) increased the repo rate by 50 basis points instead of a widely expected 25 basis points, due to increased risks to the inflation outlook and a weaker Rand exchange rate.

The Sarb’s headline inflation forecast for this year is notably higher at 6.0%, compared to the 5.4% expected during the January meeting.

This means repo rate is now 7.75%, the highest since April 2009.

The Sarb’s 2023 real GDP growth forecast is also little changed at 0.2% and the bank estimates that the current scale of power outages will shave up to 2 percentage points from the country’s economic growth this year.

Prof Jannie Rossouw, visiting professor at the Wits Business School, was one of the few economists who predicted an increase of 50 basis points due to the fact that inflation remains stubbornly high.

He does not think that another repo rate increase will curtail economic growth, as no real growth can happen without consistent energy supply from Eskom, calling load shedding South Africa’s biggest challenge.

Prof Bonke Dumisa, independent economist, also predicted the 50 basis points increase, though he is not happy that he was right. He does not see increase stopping soon, while the Sarb only predicts that inflation will return to the midpoint by the third or fourth quarter of 2024.

“As long as inflation stays high, the MPC will only believe that it must restrain inflation. I am also concerned that it will give public service employees another chance to make more noise about double digit increases. If government gives in to their demands, inflation will increase even more as it is pushed up by government related services.”

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Concern about inflationary risks

Economic research group, Oxford Economics Africa, says the MPC’s voting patterns show that members are now more concerned about inflationary risks.

“We see the Sarb’s current policy path potentially playing out in two ways: first, our revised base case is for interest rates to remain steady at 7.75% for the remainder of the year, with the first series of cuts to come in H1 2024.

“The second most plausible scenario in our view is that prices remain stubbornly elevated, fuelled by a weaker Rand exchange rate and the effects of load shedding and the MPC raises rates by a further 25 basis points during its next policy meeting in late May 2023.”

Prof Andre Roux, economist at Stellenbosch Business School, was also not surprised by the increase. “However, the extent of the increase was more than market commentators expected. The domestic inflation rate remains firmly above the upper end of the target range of 3 to 6 percent and this, along with the constitutional mandate to protect the value of the currency, virtually compels the Sarb to impose and adhere to a strict monetary policy, until there is clear evidence that inflationary pressures are subsiding.”

He also points out that it was the international trend for over a year to increase interest rates and should we fail to follow suit, the already beleaguered Rand exchange rate would come under further pressure. 

“Notwithstanding the constitutional and institutional arguments for a tighter monetary policy, there are equally compelling reasons to support a relaxation. With the SA economy being on the verge of a technical recession, along with double-digit food inflation, inordinately high levels of unemployment, high personal debt burdens and persistent load shedding, some leniency is easy to justify. Moreover, there is evidence emerging – globally and locally – that inflationary pressures might be softening.“

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Inevitable increase in face of high inflation

Prof Raymond Parsons, economist at the NWU Business School, says with the battle against inflation not yet seen as conclusively won, it was inevitable that the MPC would continue with its interest rate raising cycle for now.

“The extent of the increase in borrowing costs was nonetheless surprising given the crosscurrents and uncertainties that the MPC itself recognised in its statement.”

He says it is also important to note that the cumulative effects of previous interest rate increases now happen to coincide with an economy that is seen by many commentators to be on the brink of a possible “technical recession” which is mainly the outcome of the electricity crisis which the MPC statement emphasised.

“The optics of yet much higher interest rates being imposed on an economy that may be on the brink of recession are not good. The question is whether ever higher interest rates are conducive to the growth South Africa needs to attract foreign direct investment.”

Luigi Marinus, portfolio manager at PPS Investments, says short-term interest rates have now increased by 4.25% since the low of 3.5%.

“The recent hawkish stance of the MPC was manifested in this meeting with the larger-than-expected interest rate increase and shows the severity with which the MPC wants to fight inflation.”

ALSO READ: Another 50 basis point repo rate hike likely, as inflation back at 7%

Possibly the top of the hiking cycle?

Patrick Buthelezi, economist at Sanlam Investments, says the MPC raised the borrowing cost by a cumulative 425 basis points since November 2021, and is clearly committed to bringing inflation down towards the mid-point.

“Looking ahead, the Sarb will probably pause and assess the impact on inflation and the economy. This possibly marked the top of the hiking cycle but this will hinge on inflation prospects and global developments. The bar for policy easing is high and it would require inflation to slow and be sustained towards the mid-point.”

Lee Naik, CEO at TransUnion Africa, says the latest repo rate hike will have a significant impact on the average consumer’s wallet, coming on top of a 325 basis points increase during 2022.

“TransUnion’s Q4 2022 Consumer Pulse Study found that two out of three consumers (67%) have already cut back on discretionary spending in the past three months and the latest increase in borrowing costs will further erode their disposable income and their ability to pay their bills.

“Consumers with vehicle asset finance and home loans will be particularly hard hit, as these large repayments continue to grow.”

Neil Roets, CEO of Debt Rescue, says he is concerned that this increase will lead to more South Africans with credit facilities defaulting on their debt.

“People are relying on their credit and store cards to put food on the table, refuel their vehicles and pay for transport to get to work.

“With each successive interest rate hike, households are battling even more to balance their budgets, with spend on necessities simply far outweighing income. As always, it is the most vulnerable households that will bear the brunt of the inevitable hikes in food and transport costs that follow these rate hikes.”