Economists expect 25 or 50 basis points repo rate increase

Economists expect an increase in the repo rate of 25 or 50 basis points when the SA Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) concludes its first policy meeting of the year on Thursday. The repo rate increased by 75 basis points in November to 7%, the seventh consecutive increase since policy normalisation started in November 2021.

The Bureau for Economic Research (BER) at Stellenbosch University says the MPC is largely expected to hike the repo rate at least once more in 2023, but the decision on the magnitude of this week’s hike is likely to be a close call between 25 and 50bps.

“Despite last week’s slightly below-consensus consumer inflation rate for December of 6.9%, inflation for 2022 came in somewhat above the Sarb’s forecast of 6.7% during the previous meeting in November.”

Average inflation expectations of analysts, business people and trade unions for 2024 increased from 5.3% to 5.6% and the BER says it has pencilled in a 50 basis points increase, which is in line with the Reuters consensus forecast. However, a split vote could tilt the increase to 25 basis points instead.

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Smaller increase of 25 basis points in repo rate?

Frank Blackmore, lead economist at KPMG, also expects a smaller increase of potentially 25 basis points. He says the additional increase is due to the 7.2% inflation rate for December, way above the midpoint of the 3% to 6% inflation target range.

“The smaller increment of 25 basis points is based on the fact that we have seen a reduction in inflation from the high of 7.8% recorded in July to the December number of 7.2%. We expect larger decreases in inflation from the middle of the year, with inflation reaching the target level of 4.5% before year end, although average inflation for 2023 is still expected to exceed this level.”

Tertia Jacobs, treasury economist at Investec, also expects an increase of 25 basis points. “There were several important developments since the November MPC meeting that could have led to an adjustment in the Sarb’s inflation trajectory.”

She says on the positive side, surprising decreases in the last two US inflation announcements and weaker than expected December retail sales and industrial production outcomes implied US rate hikes will amount to a total of 50 basis points in coming months, contributing to a weaker US Dollar, while an earlier reopening in China combined with the weaker USD have bolstered the Rand.

However, Nersa’s revenue increase granted to Eskom translated of 18.65% and 12.7% in the next two years, coupled with the intensification of the electricity crisis, has led to another round of downward growth revisions as well as inflation expectations edging higher.

“With 2023 in above the upper end of the target band of 6.0% (6.1% vs 5.9%), means inflation continues to be a large consideration. In fact, with the destination rate unclear as the Sarb worries about prolonged elevated inflation and the effect on inflation expectations, there are a lot of moving dynamics that need to be considered.”

Jacobs says Investec thinks the Sarb could remain cautious and flag upside risks in view of electricity and oil price dynamics.

ALSO READ: Consumers must brace for more rate hikes until meaningful inflation decline

Maybe 50 basis points increase?

Brina Biggs, senior manager at 1Life, concurs with economists who expect an increase of 50 basis points, which will really have a negative effect on households and those who purchased new homes who will see a massive increase in just those repayments alone, never mind tariff increases, medical aid and food with food inflation increasing in December.

“Consumers are paying more and more and getting less out of their salaries. I think it will really start impacting consumer finances in the first quarter of 2023 if no other pressures are relieved. I believe consumers should protect their generational wealth by not going after the low hanging fruit, such as cancelling insurance and the important things that protect your family and future wealth down the line.”

She says consumers should rather look at their immediate gratification, see where they can cut on food, make a meat-free Monday a real deal in their budgets and just look at how they can cut costs and protect their family for that long-term growth.