Economists expect repo rate to stay the same ahead of festive season spending

Economists expect the repo rate to remain the same ahead of the Monetary Policy Committee (MPC) statement on Thursday, after initially thinking that it could be increased at the last meeting of the year to prevent excessive spending over the festive season.

However, the economy is in no shape to absorb another increase, says economist Mike Schűssler.

“With the massive increase in the petrol price, an increase in the repo rate will hurt the economy even more. It is a difficult decision, but I think the committee will rather wait for next year to increase the repo rate, as inflation is rising.”

The current inflation rate is 5.0% and the repo rate currently sits at 3.50%. The repo rate is the rate at which the South African Reserve Bank (Sarb) lends money to commercial banks in South Africa. The MPC of Sarb sets the rate and has left it unchanged for the past seven meetings.

Meetings are held six times per year. The basic aim of monetary policy is to determine how much money an economy should have in circulation and is implemented by setting a short-term policy rate called the repo rate.

ALSO READ: Reserve Bank keeps SA’s repo rate at 3.5%

Inflation and the repo rate

Professor Dumisa Bonke, an independent economist, says to understand the decision the MPC must take depends on what happened to inflation over the past year.

“Some members could panic now that the inflation rate has increased to 5.0%, but I do not think that inflation will increase to above 6.0%.

“When inflation increased to 6.2% in the US, many global markets expected the central bank of the US, the Federal Reserve system or Fed, to meet urgently to increase rates, but it did not. All other governments then also decided not to increase rates.”

Bonke says the repo rate should only be increased when consumers and businesses act irresponsibly and there is no evidence that they are. Therefore, it would be counterproductive to increase the repo rate now.

“The increase in the inflation rate is due to the petrol price increases. I think the committee will decide that the rate remains unchanged, although the hawks on the committee will want it to change due to the inflation rate.

“If the rate does increase, it will damage the economy and we must remember that it will affect the poor,” he says.

Professor Jannie Rossouw from the Wits Business School agrees that the repo rate will remain the same.

“I think that it will stay the same because the committee first wants to see what the effects of the higher inflation rate will be. Inflation expectations are still developing and it is too early to say what will happen to the inflation rate.”