By Ina Opperman
The repo rate has been increased by 75 basis points (BPS) to 5.5%, the steepest hike since September 2002.
Many economists believed it would be increased by 50 basis points, in line with the last few hikes, but it seems after the high inflation rate increase, it had to happen.
The banks’ prime lending rate will now increase to nine percent after Lesetja Kganyago, governor of the South African Reserve Bank (Sarb), announced the monetary policy committee’s (MPC) decision yesterday.
Oxford Economics Africa said an outsized rate increase by the US Fed with a quickening in domestic inflation meant Sarb was widely expected to implement another sizeable rate increase during its July MPC meeting.
“Moreover, we expect the Sarb will keep its foot on the accelerator with more policy tightening heading into 2023.
“A hawkish US Fed and the recent bout of rand weakness imply Sarb will be attentive to the risk of capital outflows.
“Having said that, as economic activity continues to weaken, it will become harder to justify tighter policy.
“By front-loading rate cuts, Sarb aims to create scope to be less aggressive down the line.”
Neil Roets, chief executive of Debt Rescue, says any way you look at it, this hike raises red flags.
Regardless of the rationale behind the steep interest rate hike and the inevitable increase in the cost of living that will follow, it is unrealistic to place more financial strain on consumers at a time when people are grappling with unbearable financial pressure.
He warns that many more people will now be looking financial devastation in the eye.
“Most frightening is the domino effect this will have on the price of food. We already have seven million people suffering from chronic hunger and 20 million are going to bed hungry every night.”
There is a possibility that half the nation will be going hungry by the end of the year and he says that cannot be allowed to happen.
EY Africa chief economist Angelika Goliger said despite the increase, the repo rate remains 75 BPS lower than in February 2020.
“In addition, 75 basis points is a relatively small increase in the overall cost of credit.”
She says in Canada, for example, interest rates increased from 0.25% in December 2021 to 2.5% in July 2022, a 10-fold increase, which is also substantially above Canada’s pre-Covid rate of 1.75%.
“South African consumers will feel the pinch in terms of bond repayments, store credit and vehicle finance, but this impact is thankfully smaller. The inflation-driven [rate is now 7.4%] increase in the cost of living is a far bigger issue.”
She says this increase, while painful now, is a sign of a central bank acting credibly to return the inflation rate to its target in order to mitigate the pain of higher inflation down the line.
The MPC had a difficult decision to make at their fourth meeting of2o22 after the inflation rate increased by 1.1% in June to 7.4%.
The difficulty of their decision was reflected in the fact that three MPC members preferred the announced increase, while one preferred a 100 BPS increase and another a 50 BPS increase.
The latest policy decision follows the 50 BPS increase in May and is the fifth consecutive increase.
A 50 BPS hike was widely expected.
The MPC aims to stabilise inflation expectations more firmly around the midpoint of the target band and increase confidence in reaching the inflation target in 2024.
The Sarb revised its real gross domestic product growth forecast for 2022 up to two percent from 1.7%, in line with better-than-expected growth figures in the first quarter.
The central bank also sees risk to South Africa’s medium growth outlook with households continuing to suffer as rising inflation, combined with higher interest rates erodes buying power.