Second repo rate increase in three years was expected

The second repo rate increase in three years was expected after the repo rate was also increased in November, the first time since the pandemic hit in March 2020. With a rapidly increasing inflation rate, there was not much choice and more increases are expected this year.

The Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) raised the benchmark repurchase rate by 25 basis points to 4% as predicted by 15 of 16 economists surveyed by Bloomberg.

This means that the prime lending rate of commercial banks will increase to 7.50% and for consumers it means, for example, that they will pay R152 per month more on their home loans of R1 million.

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Repo rate increase in line with inflation

“The increase in interest rates was broadly in line with our expectations, especially after the case for a rate hike grew last week when inflation data for December 2022 came in higher than expected at 5.90%, close to the top of the bank’s 3%-6% target range,” says Adriaan Pask, chief investment officer at PSG Wealth.

“However, we have previously said that, should the MPC decide to raise borrowing costs to contain prices, the changes will most likely be small and gradual. A 25 basis point hike every few months will not be a shock for economic growth or the local market. 

“Market participants will continue to be sensitive to any developments relating to unemployment, wages, inflation and interest rates and therefore investors should also expect heightened volatility over the next few months.” 

Herman van Papendorp, head of investment research and asset allocation at Momentum Investments, says the rate decision was in line with 19 of the 23 surveyed analysts in the Reuters poll.

“We expect a more gradual pace of normalisation than the forward rate agreements market, which estimated a total of 200 basis points of interest rate hikes this year and a further 100 basis points in 2023 in the run up to the meeting.”

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Higher repo rate will increase financial pressure

Oxford Economics Africa also expected an increase of 25 basis points and says private sector investment has benefited from low borrowing costs, which has contributed to the economic recovery in 2021.

“The Sarb is aware that it must use the room it has to raise rates wisely or run the risk of bruising an already scarred South African economy. The rand has been fairly resilient relative to other emerging market currencies since the start of the year, which implies that the 25-bps increase is sufficient at this point in time. We forecast interest rates to rise by at least 75 bps over the course of the year.”

Weihan Sun, director of research and consulting at TransUnion Africa, points out that, with many products linked to repo rate, a greater number of consumers could face increased financial pressure and affect the default rate as well as the demand and supply characteristics of the market.

“As interest rates rise, the cost of money increases, and introduces additional expenses to the consumer wallet without a corresponding increase to their income. South African households had an average debt to disposable income ratio of 76% following the rate increase in November 2021, and the latest increase could push this as high as 77%.”

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Repo rate increase and housing market

Marcél du Toit, CEO of Leadhome Properties, forecasts that the rate increase will have little impact on the back of a record bullish South African residential property market, particularly as prime interest rates are still attractive and repayment increases remain marginal.

“Other factors, such as inflation, load shedding and consumer confidence are more likely to influence decisions to invest in a property. According to Leadhome’s data, the bullish trajectory seen throughout 2021 is set to continue, with January numbers significantly higher, year on year.”

However, Andrew Golding, chief executive of the Pam Golding Property Group, says there was room for a pause in the upward repo rate cycle. “Following on from November’s repo rate increase, we had hoped that there would be a pause in the upward cycle trend, but with the December consumer inflation rate (at 5.9%) close to the upper limit of the Reserve Bank’s inflation target, the MPC was likely to take this decision to increase rates now.”