Repo rate increases not quite over, but relief is within sight

Punch-drunk consumers are wondering when the current cycle of repo rate increases will stop after it was increased by another 25 basis points last week, putting the repo rate at its highest level since before the 2008/9 global financial crisis.

The South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) increased the benchmark repo rate to 7.25% at its bi-monthly meeting last week. It was the eighth consecutive increase since policy normalisation started in November 2021.

Obviously, the question on everyone’s lips is: “When will the increases stop?”

Most consumers are finding it increasingly difficult to afford everything they need to pay for on their salaries which hardly increased last year, while they have to pay more for everything, including food, fuel and electricity.

Neil Roets, CEO of Debt Rescue, says if you took out a bond for R1 million before the current cycle of repo rate increases started in November 2021 at the prime lending rate of 7%, you would have started off with monthly repayments of R7 869. Now, that the prime rate has increased to 10.75%, your repayment will be R10 282, which is R2 413 more.

If you got car financing for R200 000 before November 2021 on a 60-month term with no deposit and no residual at the prime rate of 7%, you would have started with monthly repayments of R4 030 and now you will pay R351 more at R4 381.

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Less aggressive monetary policy tightening

According to the PwC South Africa Economic Outlook January, the Sarb lifted interest rates by a cumulative 375 basis points since November 2021, as it normalised monetary policy after the big rate cuts in the first half of 2020 and attempted to manage local inflation expectations as price pressures escalated in 2022.

In the report, PwC points out that recent monetary policy tightening has been less aggressive compared to several instances in the recent past, including the hiking cycles that started in 1994, 1998 and 2002.

PwC says interest rates are on the cusp of peaking and could start declining from the third quarter of the year, as the Sarb bases its interest rate decisions on forward-looking considerations, specifically their inflation forecasts.

“The latest Sarb projections indicate the central bank expects consumer price inflation to be around the midpoint (4.5%) of the target range from the third quarter of 2023 and, therefore, we expect interest rates to start easing in the second half of this year, given that recent monetary policy tightening took the repo rate to above its pre-pandemic level.

“However, with continued upside risks to the inflation outlook, there will be limited scope for lowering interest rates this year and heading into 2024.”

ALSO READ: Inflation moderating but interest rates will increase

Rate-hiking cycle may be ending

Jacques Celliers, CEO of FNB, says while central banks around the world may continue to raise interest rates in their fight against inflation, there are clear indications that this rate-hiking cycle may be coming to an end.

“Higher interest rates significantly benefited consumers who receive income from cash savings instruments. However, load shedding resulted in additional unplanned expenses for households and businesses that are striving to stay afloat amid the disruptions.”

Mamello Matikinca-Ngwenya, chief economist at FNB, says similar to the softer magnitude of hiking in more advanced regions in December, the Sarb also lowered its pace since delivering 75 basis points increases between July and November 2022.

“We still believe that the MPC will reach the terminal of the current hiking cycle in the first quarter and that if another 25 basis points hike is delivered in March, there should be space to support the economy before year-end. Nevertheless, global interest rates generally remain higher for longer as expectations of future inflation remain above target.

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Will inflation stay too high?

Jeff Schultz, senior economist at BNP Paribas South Africa, says the Sarb kept the door wide open for more hikes if necessary and given the economic uncertainties, a slim majority on the MPC managed to convince those calling for more aggressive action to buy some optionality instead.

“However, the governor made it clear in his remarks that should inflation prove stickier than it currently projects (we think very likely), it would not hesitate to act and that the policymakers “mean business” in ensuring inflation and inflation expectations re-anchor towards its preferred 4.5% target.”

He, therefore, maintains that the door remains wide open for another 25 basis points hike in March and potentially more down the line, depending on inflation and the Rand. “Our expectation that CPI will end the year still 1 percentage point above the Sarb’s preferred target, alongside our view that inflation will sustainably return to 4.5% only by 2025, underpins our view that the central bank will not be in a position to begin a modest cutting cycle until May 2024. We maintain our end-2024 repo rate forecast of 7.00%.”

Adriaan Pask, CIO at PSG Wealth, says PSG Wealth sees a continued upward trend in global interest rates, even if inflation rates stabilise, given the need for rate normalisation.

Arthur Kamp, chief economist at Sanlam Investments, points out that the Sarb frontloaded its interest rate hikes in this cycle. “Also, at 7.25% the repo rate is above the level of 7.08% projected by the Sarb’s Quarterly Projection Model (QPM) for year-end 2023. It is never easy to pinpoint the likely terminal interest rate during a hiking cycle and as the Sarb notes, future interest rate decisions will be data dependent.”

However, he says, Sanlam is confident in the projections for inflation and growth and there is an argument to be made that we are very close to the peak, perhaps one more 25 basis points interest rate hike, before, at the least, a pause.

ALSO READ: South Africans’ take-home pay in 2022 down by almost 5%

Maybe more 25 basis points hikes?

Frank Blackmore, lead economist at KPMG, says we should remember that the MPC targets inflation and as long as that inflation is outside the target, we can expect further increases of the repo rate, although these will probably be more in line with the 25 basis points of last week.

Tertia Jacobs, treasury economist at Investec, also thinks the interest rate cycle has possibly peaked, but she says Investec will continue to monitor developments in the rest of the world.

Carmen Nel, economist and macro strategist at Matrix Fund Managers, says if inflation expectations in the BER’s first quarter survey shows a marked decline, there is a notable chance that this is the end of the hiking cycle.

“However, we think the numerous risks between now and the March meeting will ensure that a further 25 basis points hike remains on the cards that will take the peak in the policy rate to 7.50%. The voting distribution, tone of the statement and significant event risk (potential grey listing, Budget, Fed FOMC) give the Sarb the option to increase the repo rate again in March, should it be deemed necessary.”