Will the repo rate go up this week? Here’s what the experts say

South Africans are wondering if the inflation rate and repo rate will increase this week, and if the ANC’s call to finance minister Enoch Godongwana to engage the South African Reserve Bank on how it can manage inflation without increasing interest rates will help at all.

Increases could be paused

Visiting professor at the Wits Business School Prof. Jannie Rossouw said he was shocked by the ANC asking the minister to talk to the South African Reserve Bank (Sarb) about not increasing the repo rate.

“It is completely inappropriate. It puts the minister in a position where he will be subject to a conflict of interest. The Sarb is independent and has the mandate to manage inflation.”

Rossouw believes the Monetary Policy Committee (MPC) will pause increases and leave the repo rate unchanged for now.

He said an increase in the repo rate will be good news for people who save, as it will mean they will benefit from a higher rate.

Up by 25 basis points

Independent economist prof. Bonke Dumisa thinks the MPC will increase the repo rate by 25 basis points from 8.25% to 8.5%, mostly because the current inflation rate at 6.3% is above the 3-6% target inflation rate range.

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Inflation expected to moderate

The Bureau for Economic Research (BER) says the latest inflation data at the Sarb’s disposal is likely to show a further notable annual moderation in headline consumer price pressure, thanks to the petrol component falling into annual deflation and, although remaining high, a projected further easing in the annual rate of increase for the food category.

“Despite the expected continued easing in domestic price pressures, in a likely close call where a pause is certainly possible, we expect a final repo rate hike of 25 basis points on Thursday. This is informed by the Fed which is widely expected to hike its policy interest rate by another and possibly final 25 basis points next week.

“Perhaps more important than possible Fed moves, the MPC will be concerned about a further increase in inflation expectations during the second quarter, as well as the volatile (albeit stronger) rand. Finally, although the Sarb will most likely present an improved inflation forecast, it may continue to flag upside risks to the outlook.”

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A final hike?

The Nedbank Group Economic Unit said it could be the final hike in the current cycle.

“We forecast one last rate hike of 25 basis points in this cycle for next week’s meeting. Although we still believe that the Sarb did enough to tame inflation and facilitate a sustainable decline towards the target range, we suspect that the MPC will err on the side of caution.

“In our opinion, the recent rise in inflation expectations, the threat of renewed severe loadshedding and the rand’s extreme vulnerability against the backdrop of the Fed’s hawkish rhetoric will set the tone for next week’s decision.”

The unit said it is also possible the reserve bank will argue the damage of pausing too soon is much greater than the cost of over-tightening as too restrictive policy can easily be reversed, while structurally higher inflation and persistently rising inflation expectations will require even greater economic sacrifices to rectify. 

“If the MPC hikes the repo rate by another 25 basis points, monetary policy will become highly restrictive. Based on our inflation forecast, which is not far off Sarb’s estimates, the real repo rate will jump to over 3% in July, climbing to around 3.5% by year-end, well above the Sarb’s real neutral rate of around 2.5%.”

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Sign of aggressive tightening

In addition, the unit said aggressive tightening over the past two years is already visible in slowing credit demand, rising loan defaults and stagnant consumer demand.

“Recent inflation outcomes have been more encouraging, suggesting that inflation is finally shifting down a gear. Headline inflation fell by more than market expectations to a one-year low of 6.3% in May after easing only slightly to 6.8% in April from 7.1% in March.”

Although food inflation remained high, the unit says it slowed noticeably to 12% from a peak of just over 14% in March.

“We expect the downward trend in headline inflation to intensify during the second half of the year. Strong base effects, lower global food, oil and other commodity prices combined with much weaker domestic demand will likely offset the impact of a volatile rand and persistent load-shedding.”

The unit expects inflation now to end the year at 5%, lower than its previous forecast of 5.2%. “Overall, headline inflation is forecast to average a lower 5.9% in 2023 (6.1% previously), before receding to 4.8% and 4.6% in 2024 and 2025, respectively.

“Most of the upside risks to the inflation outlook flagged by the MPC at the May policy meeting have also eased. Global inflation is receding more convincingly. Global oil prices remain subdued and world food prices are still sliding off a high base.

“On the domestic front, electricity supply proved fractionally more reliable than most expected this winter and the rand pulled back from record lows against a weaker US dollar. Despite these hopeful developments, a vulnerable rand and the likely return of more severe load-shedding remain the key upside risks to the inflation outlook.”