More interest misery – 50 to 75 basis points repo rate increase expected Thursday

Economists expect only a 50 basis points increase in the repo rate on Thursday because the inflation rate remains over the 4.5% threshold and the combatting of inflation requires a synchronised approach by all countries. Others believe that a 75 basis points hike is more likely.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) is meeting on Thursday to decide on the new repo rate. The MPC meets every second month and at the last two meetings decided to increase the repo rate by 75 basis points every time.

Consumers with debts are now waiting with bated breath to hear what the new increase will be, while those with investments are hoping for a large increase that will boost the interest on their savings. Will the MPC follow the US Fed and increase rates by another 75 basis points that was the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008?

“I expect the MPC to announce a further 50bps increase in the repo rate after Thursday’s meeting for two reasons. Firstly, the inflation rate remains way above the 4.5% target (with the September reading at 7.5%) and secondly, due to inflationary sources being global, the combatting of that inflation requires a synchronised approach by all countries.

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MPC will have no choice to increase repo rate

“With major central banks increasing their rates further, the MPC will also have to increase the repo rate to remain in step with other countries,” Frank Blackmore, lead economist at KPMG, says.

As there was some decrease in inflation in September (7.5%) from the high recorded in July (7.8%), it is possible for the MPC to increase the repo rate by a smaller amount of 50 basis points.

“In addition, there was evidence that the prices of oil and food are decreasing due to the expectation of lower global growth prospects as monetary policy around the world continues to decline.”

Blackmore says the impact will obviously not be good for borrowers who will need to pay more to service their debts in future, “because funds previously allocated to consumption or investment activities will no longer be available, therefore further decreasing the near-term growth prospects for SA.”

However, the Bureau for Economic Research at Stellenbosch University (BER) says amid sustained risks around the inflation outlook, including a softer rand exchange rate than assumed at the previous interest rate meeting, the MPC is set to hike its policy interest rate by another 75 basis points.

“While our baseline is for a 75 basis points increase, indications of an imminent downshift in the pace at which major central banks hike, as well as a deteriorating global and domestic growth outlook, imply that a smaller 50 basis points hike cannot be ruled out.”

The BER says while likely stressing data dependence and the meeting-to-meeting nature of global monetary policy decisions of late, markets will be looking for a possible indication that the SARB is nearing the peak of its hiking cycle.

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Global developments will also determine repo rate

Tertia Jacobs, treasury economist at Investec, points out that after a hawkish 75 basis points rate hike at the September meeting, with two of the five members in favour of a 100 basis points rate hike, several developments globally have a bearing on the MPC’s decision to hike the repo rate by 50 or 75 basis points.

“Central banks in advanced economies have indicated that the pace of rate hikes could moderate following aggressive front loaded rate hikes implemented in 2022. While the near-term headline CPI inflation forecast is likely to be revised higher, as some of the factors flagged in the balance of risk assessment in September materialised when the petrol price increased in October and the rand depreciated until early December.”

However, she says, there have been several more constructive developments. Market volatility declined in the aftermath of the November FOMC and US CPI and the USD has lost some lustre. Inflation expectations, measured by 5- and 10-year breakeven inflation rates, receded considerably from 7.0% to 5.7% and 7.0% to 6.3% respectively, the oil price declined, international food prices receded and the US dollar depreciated.

“Incoming demand indicators show that retail sales have lost momentum and the increase in load shedding intensity is rendering the operational environment more challenging. October’s CPI inflation rate is scheduled for release on Wednesday, the day before the MPC meeting and is expected to have stabilised with Bloomberg consensus forecasts at 7.4% from 7.5%. Core CPI inflation is expected to trend higher, rising to 4.9% from 4.7%.”

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Repo rate expectations

Jacobs says Investec forecasts a 50 basis points hike, in a vote of 3-2, while Bloomberg consensus expectations are for a 75 basis point hike and the implied forward rates are pricing in a 50 basis points rate increase. “While the level of external and internal uncertainty remains elevated, the balance of inflation is likely to remain to the upside.”

Neil Roets, CEO of Debt Rescue, says economists are currently divided around what to expect between 50 and 75 basis points, with some expecting even higher.

“Looking at trends this year, the SARB followed the lead set by the US and UK and if that is anything to go by, it could very possibly be another 75 basis points. The latest inflation announcement this week will definitely also play a role in the decision.”

Whatever the percentage, the reality is that South Africans cannot afford it. This year has dealt South Africans so many financial blows already, with fuel prices still at 14% higher than they were at the beginning of the year and another steep hike on the cards for December.

“Inflation in September was at 7.5%, which is well outside of the SARB’s benchmark percentages of 3-6% and has been for the past 6 months. Consumers have felt the brunt of all of these increases on their pockets and are struggling financially with more month than money.”