Experts predict more repo rate hike woes for South Africans in May

Economists predict that more misery will likely be imposed on South African vehicle and home owners, as the central bank’s Monetary Policy Committee will meet to discuss the country’s repo rate later next week, with a steady increase on the cards.

Currently, the repo rate is at 7.75%, after it was raised by the South African Reserve Bank’s Monetary Policy Committee in March this year. In total, the repo rate has lifted by a cumulative 425 basis points over nine meetings.

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KPMG’s lead economist, Frank Blackmore, predicts that the repo rate could likely be increased by 25 basis points at the upcoming sitting. He explained that this is because the Monetary Policy Committee was committed to reduce inflation to the target of 4,5%.

“Current inflation from March this year is at 7.1% and there’s an expectation that inflation will remain at this level in the April reading that should be released in two weeks’ time.

“If inflation remains around that 7 to 7.1%, its obviously still well above the inflation target of 4.5% and will mean that the Monetary Policy Committee will raise the repo rate potentially by 25 basis points in its May meeting,” he said.

In line with other countries

He went on to explain that this increase would be in line with other areas around the world at their recent meetings also.

“Other factors contributing to the potential increase will be the recent weakening of the rand and the persistent level of inflation that we have seen through to April this year. There is an expectation for inflation to start reducing from May onwards, given that in May last year, the biggest inflation increases started coming through,” he concluded.

Meanwhile, Tertia Jacobs, Treasury economist at Investec, reckons that the context of May’s MPC meeting should be quite interesting.

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“Internationally, the rate hiking cycles of the Federal Open Market Committee (FOMC) and the European Central Bank (ECB) have reached an advanced stage. Chair Powell states that the FOMC is no longer saying they anticipate rate increases, interpreted as a hawkish pause.

“The ECB moderated the pace of rate hike as the pace of QT is tightening, with the President of the Bundesbank stating that the ECB may be approaching the final leg of its historical cycle of interest rate increases,” she said.

Stagnation is intensifying

Jacobs confirmed that in South Africa, stagflation was intensifying. She explained that the rand has come under significant pressure as SA-specific factors have undermined sentiment.

“Load shedding, SA’s greylisting in February and downward revisions have been factors that caused the rand to underperform DM and EM currencies since November 2022.

“The US embassy’s announcement last week that South Africa provided weapons to Russia, even as South Africa is non-aligned to the US, Russia and Ukraine, followed by the appointment of a judicial commission of inquiry by President Ramaphosa, has added to the country risk premium.

“Economic policies remain uncertain and the lack of urgency to address many issues is of grave concern. Input costs of companies continue to rise, and cost-push inflationary pressures are mounting. The weak ZAR is countering the effect of lower international oil and food prices,” she said.

Jacob said that she believes that the South African Reserve Bank was likely to continue hiking rates as it remains committed to combat inflation.

She added that widening short-dated interest rate differentials could stabilise the rand in the short-term whereas the above-mentioned concerns can only be addressed by political will and the inclusion of the private sector in fixing the broken infrastructure.

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