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The repo rate increase brings more financial pain for consumers who already have to pay more for food and fuel. They will now also have to pay more for all their debts as the repo rate increased by 25 basis points to 4.25%.
Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), announced the decision of the Monetary Policy Committee (MPC) on Thursday afternoon. Consumers were worried that the repo rate could even increase by 50 basis points considering the inflation rate of 5.7% and surging oil and food prices.
During its deliberations, two members of the MPC preferred a 50 basis point rise in the repo rate, while the other three preferred the 25 basis point increase. This means that consumers will now face a prime rate of 7.75% that will require them to pay R218 more on a home loan of R1.280,000.
This is the third time in a row that the repo rate is increased.
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Kganyago said headline inflation has increased well above the mid-point of the inflation target band in the near-term and is forecast to breach the target range in the second quarter.
Just as the country followed the world trend to start its economic recovery, the war in Ukraine brought everything from oil to food surging to record highs again. Kganyago says the war is expected to reduce global economic growth and contribute to higher inflation as well as probably impair production of a wide range of energy, food and other commodities while it further disrupts global trade.
“Last year saw the ongoing recovery of the South African economy from the pandemic, expanding by 4.9% for 2021 as a whole, marginally higher than the 4.8% we had forecast in January. Oil prices are revised up further for this year and fuel price inflation is higher at 26.1%, up from 13.7%.
“Local electricity price inflation is revised down to 11.0% for 2022 from 14.5% and to 9.2% in 2023 from 12.4%, while for 2024, electricity price inflation of 10% is expected, unchanged from the previous meeting.”
Kganyago also pointed out that, as a result of higher global food prices, local food price inflation is also revised and is now expected to be 6.1% in 2022, up from 4.8% and 5.1% in 2023, up from 4.6%. Food price inflation is forecast to ease to 4.4% in 2024, down from 4.6%.
“The Bank’s forecast of headline inflation for this year is revised higher to 5.8% from 4.9%, primarily due to the higher food and fuel prices. While food prices will stay high, fuel price inflation should ease in 2023, helping headline inflation to fall to 4.6%, despite rising core inflation.”
The risks to the inflation outlook are assessed to the upside, he said.
“Global producer price and food price inflation continued to surprise by increasing in recent months and could do so again, particularly if the war in Ukraine persists into the growing season.”
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Oil prices also increased strongly in 2021 and are up again sharply compared to last year as it is propelled higher by the war and economic sanctions, while electricity and other administered prices continue to present short- and medium-term risks.
Kganyago says higher diesel and coal prices can lead to upward revisions to the electricity price forecast for 2023.
“Given below-inflation assumptions for public sector wage growth and higher petrol and food price inflation, considerable risk attaches to a still moderate nominal wage forecast.”
Moving to global financial conditions, Kganyago says these are more volatile at present and with higher than expected inflation, have pushed major central banks to start the normalisation of global policy rates. Capital flow volatility is expected to remain high for riskier assets such as emerging market debt and currencies.
“Average surveyed expectations of future inflation have increased to 5.1% for 2022 from 4.8%. Market-based surveyed expectations for inflation have also increased to 5.5% and long-term inflation expectations derived from the break-even rates in the bond market have also increased.”
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The governor also said that economic and financial conditions are expected to remain more volatile for the near future.
“In this uncertain environment, policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook. The MPC will seek to look through temporary price shocks and focus on potential second round effects and the risks of de-anchoring inflation expectations.”
Current repurchase rate levels reflect an accommodative policy stance through the forecast period, keeping financial conditions supportive of credit demand as the economy continues to recover. The Bank has ensured adequate liquidity in domestic markets and will continue to closely monitor funding markets for stress.
Kganyago does seem to have hope for the economy, saying that better anchored expectations of future inflation could support lower interest rates.
This can be realised by achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains.
“These steps will enhance the effectiveness of monetary policy and its transmission to the broader economy,” he says.
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