50 bps repo rate hike expected and appropriate – economists

The 50-bps repo rate hike was expected and is appropriate, economists say after the announcement on Thursday that the Monetary Policy Committee of the Reserve Bank decided to deviate from the usual 25 basis points of the past few months.

The rate hike during the May meeting was the first 50-bps rate increase since January 2016. According to economic research group Oxford Economics Africa, the May meeting was well timed for a larger interest rate increase as it is the only policy meeting for the second quarter and the latest data developments points to the annual inflation peaking at the end of the quarter before gradually moderating.

The decision of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) to increase the repo rate by 50 bps was in line with the consensus view, including its own, the group says.

“Voting patterns indicate that four policy members preferred a 50-bps rate rise, while one opted for a 25-bps increase. The Sarb has lifted rates by a cumulative 125 bps since it embarked on its hiking cycle at the end of 2021.”

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Real GDP

Oxford Economics Africa also agrees with the decision to revise the real GDP growth forecast for 2022 down to 1.7% from 2.0% due to the flooding in KwaZulu-Natal and persistent electricity supply constraints.

“This is more in line with our view that real GDP growth is likely to moderate to 1.5% this year (versus 4.9% in 2021), due to elevated inflation and tighter monetary policy in addition to the short-term factors.”

The group says policy uncertainty and loadshedding will continue to undermine South Africa’s potential growth rate, while slowing global growth also poses a threat to the country’s economic recovery.

Oxford Economics also expects that households will increasingly feel the pressures of higher costs, as rising inflation and higher interest rates erode buying power. “Stagflation is now our base case for the South African economy in 2022.”

Jee-A van der Linde, economist at the group, says the Sarb has done its bit this round. “The 50-bps rate rise is considered appropriate given the latest inflation developments and following the US Fed’s recent 50-bps rate increase.”

The April inflation print of 5.9% compared to April last year shows prices are not running away in South Africa, although conditions can change quickly in this highly uncertain environment.

The group also expects more rate rises in the third and fourth quarters, with policy decisions continuing depend on data with the forecast that the repo rate will end the year at 5.25%.

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Inflation and the repo rate

Prof. Jannie Rossouw also expected the high increase in the repo rate and says its shows that the Sarb is worried about continuing inflation expectations. “The Sarb saw what happened with the Federal Reserve in the US and learned a lesson from it.”

He says the repo rate can be increased further if inflation keeps increasing rapidly. “What worries me is infrastructure imploding.”

Carmen Nel, economist and macro strategist at Matrix Fund Managers also says the increase was in line with consensus expectations and market pricing. “The Sarb is certainly aware of downside risks to growth, but much of the fragility lies outside the purview of monetary policy.

“Weak potential growth is rather due to persistent and pervasive constraints, such as electricity, as well as cyclical weakness due to the floods. If anything, the SARB is concerned that rapidly rising prices will hurt growth via constraining consumption power, particularly for the poor.”

She says although she disagrees with some views that the Sarb was falling behind the domestic inflation curve, there was some risk that the Sarb would fall behind the global monetary policy curve.

“Today’s hike and reinforcement of the central bank’s inflation-fighting credibility probably puts the bank ahead of the domestic inflation curve and better aligns the local policy stance to global dynamics.”

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The markets did not mind the increase

Nel also points out that this view was borne out by the price action in the market.

“The rand and domestic bonds reacted positively to the outcome, which suggests that the level of the policy rate is not yet a concern for the growth outlook. Rather, the prudent approach by the Sarb in the face of elevated inflation risks should reduce the risk premium embedded in SA asset prices.”

Jeff Schultz, senior economist at BNP Paribas South Africa, says today’s hike was mostly about inflation. ‘Materialising upside risks to the inflation outlook through food, fuel and some growing evidence of broader second round pressures creeping into prices means that the Sarb now does not see CPI coming back towards its 4.5% target midpoint on a sustained basis until late 2024, a view we agree with.”

He says the Sarb’s divided decision on the size of the rate hike still communicates that it remains sympathetic to growth challenges.

“However, only modest downward revisions to its 2022 GDP forecast (-0.3pp to 1.7%) and its maintenance of growth at 1.9% in outer years implies that it believes the economy is more resilient than we expect.”

Schultz says the Sarb’s assertion that the risks to the growth outlook are balanced, given the increasingly nuanced global growth backdrop, is interesting and indicates a central bank that is more focused on incipient inflation risks right now rather than a still opaque global growth backdrop.

‘Given the Sarb’s “data dependent” language and scope for further upside surprises in CPI in coming months, we hold onto our call for another 50bp hike to be delivered in July, with the policy rate ending 2022 at 5.75% vs QPM output of 5.3% and for a terminal policy rate of 6.5% to be reached by mid-2023 as the bank looks to more aggressively build up policy buffers.”