Repo rate expected to go up on Thursday

The repo rate is expected to go up on Thursday as the inflation rate for February remained the same as in January. The question is if it will increase by 25 or 50 basis points after an increase of 25 basis points in January.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) will announce its decision about the repo rate on Thursday. The repo rate is the rate at which the Sarb lends money to commercial banks and one of the tools it uses to control inflation, which was 5.7% in January and February.

Inflation targeting is a framework in which the Sarb uses monetary policy tools, especially the control of short-term interest rates, to keep inflation in line with a given target. South Africa’s inflation target range is 3−6%. The MPC would like to see inflation close to the 4.5% midpoint of the 3–6% target range.

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Repo rate up by 25 or 50 basis points?

The Bureau for Economic Research (BER) at Stellenbosch University expects the repo rate to be increased by 25 basis points, which would be the third consecutive rate hike. However, the BER does not rule out a 50 basis points increase completely.

“It will also be interesting to see how the Sarb sees the war in Ukraine influencing South Africa and the inflation trajectory going forward.”

Adriaan Pask, CIO at PSG Wealth, says the Sarb’s quarterly projection model is pricing in a quarter-point increase in the benchmark repo rate to 4.25%.

“At its previous meeting in January, the Sarb revised its inflation projection upward to 4.90% for 2022 and 4.50% for 2023.”

He says these revisions came as Eskom announced plans to increase electricity prices by 20.50% in April 2022, following a 15% increase in 2021.

“Considering recent oil price increases on the back of the Eastern European conflict, a consensus among economists is that the Sarb might again revise its inflation projection to above 5% for 2022.”

However, if the rand remains resilient and sheltered by higher commodity prices, the Sarb is expected to keep its gradual hiking pace.

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Increase thanks to Ukraine and higher inflation rate

Economist Mike Schűssler also says the current war between Ukraine and Russia will affect major commodity prices which will impact inflation in South Africa and globally.

“Owing to the higher inflation rate and the crisis in Ukraine – which has led to soaring oil prices – many are expecting the Sarb to hike interest rates at tomorrow’s MPC meeting. Although household borrowing among South Africans has eased to below the inflation rate, the hike could lead to higher mortgage repayments.”

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says the latest surge in international oil prices has triggered a large upward revision in the Reuters consensus forecast for inflation.

The consensus expects headline inflation to average 5.5% (January 2022 estimate: 4.8%) for 2022, 4.4% in 2023 (marginally below the January 2022 estimate of 4.5%) and 4.4% in 2024 (unchanged since the January 2022 estimate).

“Despite the significant upward revision to expected headline inflation for this year, the Reuters consensus still expects the repo rate to end the year at 4.75%. In our view, the risk of sustained higher international oil prices and an accelerated hiking cycle globally could bring forward the local interest rate cycle, although we still expect the terminal interest rate to reach 5.75%.”

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Containing long-term impact

Economic research group Oxford Economics Africa expects the Sarb to increase the repo rate by 25 basis points on Thursday, with another 75 basis points to follow during the rest of the year.

“Officials will be cognisant of growing risks to South Africa’s economic outlook and the immediate pressures consumers face. The Sarb will be focussed on containing the longer-term impact that higher prices have on spending power, while considering real interest rate levels and potential risks of portfolio outflows.”