Load shedding to blame for repo rate increase of 25 basis points

The repo rate increasing by 25 basis points can mostly be blamed on the near-term risk of load shedding to the economy.

The South African Reserve Bank’s (Sarb) Monetary Policy Committee (MPC) opted for a 25 basis points rate increase today, against the consensus forecast of a 50 basis points increase, with the Sarb also making notable downward revisions to its real gross domestic product (GDP) growth forecast for the next three years, flagging load shedding as a key near-term risk to the economy.

Three members voted for the 25 basis points increase, while two preferred a 50 basis points increase.

Sarb Governor Lesetja Kganyago noted that at the current rate of 7.25%, the repo rate supports near-term credit demand while the latest increase is consistent with the Sarb’s view of inflation and risks.

Economic research group, Oxford Economics Africa, says the 25 basis points was a notable step down from the 75 basis points increases of the previous three meetings to 7.25%.

“Although the repo rate is now at its highest level since July 2009, the Sarb’s current hiking cycle has not been the most aggressive on record, nor will it be the longest.”

The group believes that the Sarb has adequately tightened monetary policy during the current cycle and that markets can start to prepare for a protracted holding period from the second quarter.

“We expect that some minor fine-tuning could be forthcoming during the next policy meeting in March, which could see the rate increase to 7.5%.”

ALSO READ: More suffering for South Africans as interest rates hiked again

A lot was said about load shedding

It was significant that Sarb governor, Letsetja Kganyago, dedicated a large chunk of his speech to discussing the detrimental economic impact of load shedding, saying the Sarb estimates that the current scale of power outages will shave up to 2 percentage points from the country’s economic growth this year. The previous estimate was 0.6 ppt.

Elna Moolman, head for SA economic, fixed income and currency research at Standard Bank, says the bank agrees with the Sarb that a 25bps rate hike was appropriate at this stage, following the significant preceding rate hikes.

“Global and domestic inflation pressure is moderating and inflation should be back inside the target range relatively soon. We do not currently forecast further rate hikes, but there is a risk that there might be one more 25 basis points rate hike at the March meeting.”

Neil Roets, CEO of Debt Rescue, says this latest rate hike is very bad news for South Africans who are paying off debt on property, vehicles and credit cards. “Consumers are hanging on by a thin thread and there is no more room to manoeuvre.

Carmen Nel, economist and macro strategist at Matrix Fund Managers, says this eighth hike in the cycle takes the policy rate to slightly above neutral, which may partly explain why the committee opted for the smaller increment, but even so, the voting split was decidedly hawkish.

 “Ongoing hawkishness is justified by the potential for tightening in global financial conditions amid significant global growth risks, the increase in surveyed inflation expectations, upside risks to food prices from load shedding and the shift from La Nina to El Nino, as well as the pending Fed decision which could lift rates by as much as 50 basis points.”

ALSO READ: Economists expect 25 or 50 basis points repo rate increase

Smaller hike not expected due to high inflation

Frank Blackmore, lead economist at KPMG, says this increase was unexpected because inflation at 7.2% for December remains well above the midpoint of the 3 to 6% target band, targeted by the Sarb.

“The risks to inflation also remain on the upside and these include the impact of the war in the Ukraine on prices of both fuel and food, as well as domestic price pressures coming from administered prices including increases in electricity as well as the impacts of load shedding on the economy.”

He noted that these increases do not represent the last increases in interest rates this year and the governor was clear to point out that the MPC will be data dependent in this regard. “We should remember that the MPC targets inflation and as long as that inflation is outside the target, we can expect further increases in the repo rate, although these will probably be more in line with the 25 basis points seen today.”

Tertia Jacobs, treasury economist at Investec, says the moderation in the pace of rate hikes shows that the MPC is starting to consider the lagged effect of the cumulative rate hikes of 375 basis points since November 2022.

“We think the interest rate cycle has possibly peaked, but we will continue to monitor developments in the rest of the world, such as the Fed’s interest rate decision and the Chinese reopening, which are important drivers of stronger global growth.”

ALSO READ: Inflation moderating but interest rates will increase

Debt costing more than 100% more than in 2021

Brina Biggs, senior manager at 1Life, warns that if you have any kind of debt, it is going to cost you 0.25% more by the end of January. Although your month to month is marginal, depending on the kind of debt that you have, the real concern lies in those who took their debt out in 2021 when the prime lending rate was quiet low.

“Now, looking at the nineth consecutive increase, it translates to an over 100% increase since November 2021. Back then, it was 3.5%, but now it is sitting at 7.25%. Some South Africans really just need to buckle down on the debt that they now need to pay across and try to get their salaries to stretch.”

Andra Nel, purpose manager at KFC, says the increase of an additional 25 basis points on the repo rate is something that most households will need to come to terms with today and what that means on their monthly household budget.

“This increase is going to put additional pressure on consumers especially for those who were already struggling to provide food for their family on a daily basis or even just putting food on the table for themselves.”