Here’s what to expect from this week’s potential repo rate increase

Experts predict that struggling South Africans can expect a 25 basis point increase in the repo rate on Thursday when the Monetary Policy Committee of the South African Reserve Bank meets, but at least one economist expects an increase of at least 50 basis points.

The Monitory Policy Committee (MPC) of the Reserve Bank (Sarb) has to decide on the repo rate after South Africa’s headline inflation rate increased to 7.0% in February, the first increase in the country’s annual inflation rate in four months.

Prof Bonke Dumisa, independent economist, says he expects a repo rate increase of at least 50 basis points due to the unexpected increase in the inflation rate.

“My reason for saying this is that the MPC increased the repo rate by only 25 basis points at their last meeting when inflation decreased to 6.9%. The MPC may thus wrongly assume that their last lower repo rate increase was not aggressive enough to lower inflation and, therefore, may opt for a higher repo rate increase of at least 50 basis points or more.”

The Bureau for Economic Research (BER) at Stellenbosch University, says in isolation, the dampening impact on global growth from the tightening in US and European bank lending standards should see the MPC take a more cautious approach towards further policy rate hikes.

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Circumstances changed after last MPC meeting

“However, this is set against a weakening trend for the rand exchange rate since the end-January MPC meeting, upward surprises in the January and February headline inflation, sticky 2-year ahead BER inflation expectations, likely fiscal slippage amid a material upward revision to the public sector wage offer and the Fed and other major central banks continuing to raise policy interest rates in the last two weeks.”

The BER says against this backdrop, it is aligned with the overwhelming analyst consensus that the MPC will hike the repo rate by another 25 basis point, taking the policy rate to 7.5%, 50 basis points above the Sarb’s estimate of the neutral (nominal) policy rate.

Nedbank’s economists also expect a 25 basis point increase, which they believe will probably be the last in the current cycle, taking the repo rate to its peak at 7.5% and the prime rate to 11%.

“The MPC will be concerned by the continued acceleration in food prices, which appears to reflect the adverse impact of load shedding on production costs.”

They says the MPC will also be alarmed by the acceleration in core and services inflation, which suggests broadening price pressures.

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says given broadening pressures in inflation and the upside risks to the inflation outlook, particularly food inflation, Momentum maintains its view of a 25 basis point increase, but also notes risks for a more hawkish stance are higher in light of renewed global financial stability risks.

Economic research group, Oxford Economics Africa, also refers to the broadening pressures in inflation and the upside risks to the inflation outlook, particularly food inflation, but also maintains its view of a 25 basis point increase.

“However, we note that risks for a more hawkish stance are higher in light of renewed global financial stability risks. The weak rand exchange rate (currently R18.5/$) together with a higher inflation rate also reinforces our forecast for another 25 bps increase in the repo rate.”

The group foresees the Sarb wrapping up the current hiking cycle in March, with the repo rate forecast to remain steady at 7.5% for the rest of the year.

“Messaging from the Sarb is unlikely to change drastically from the January meeting, or even after the latest uptick in the headline inflation rate, but the Sarb will remain cognisant of inflationary risks and likely contend that monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.”

Concerns about broader financial market contagion have risen and this will likely be top of mind for MPC members, the group says.

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Consumers warned to tighten belts even more

Bertie Nel, head of financial planning and advice at Momentum warns that households must adapt their finances in the face of rising interest rates, saying the world has been thrust into a significant interest rate increase cycle in recent years to curb inflation and maintain economic stability.

“In South Africa, the most recent interest rate increase of 25 basis points in January this year escalated the repo rate to 7.25% and the prime lending rate to 10.75%. Economists warn that we are likely to see another interest rate increase before the end of this month.”

He says while interest rate increases may benefit investors, it has a dire impact on many South African households.

“Interest rate increases also increase the cost of borrowing for consumers, making it more difficult for them to repay debt. These increases have a substantial and tangible effect on the average South African’s pocket, with credit card debt being a primary burden and a cause for concern in a country laden with debt.”

A Financial Sector Outlook study by the Financial Sector Conduct Authority revealed that over half of South Africa’s credit-active consumers are over-indebted and the Sarb stated that South Africans spend approximately 75% of their salaries on debt repayments.

Nel says interest rate increases also lead to consumers having less money to put towards saving for their financial goals. The 2022 Momentum UNISA Household Financial Wellness Index found that in 2021, households experienced rising consumer price inflation, interest rate increases and high unemployment, which made achieving financial goals more challenging.

Numerous other factors also put pressure on consumers in South Africa, including a cost-of-living crisis and looming global recession, which can have even more dire effects on the household finances of everyday South Africans.

“While all these factors make it more difficult to put money away, we should not underestimate the importance and value of saving money, especially when even tougher times lie ahead. Making smart money moves is now more important than ever, while saving is a vital tool on your journey to financial success.“