By Ina Opperman
The 50 basis points increase was not unexpected, although many economists predicted an increase of only 25 basis points.
Rolling blackouts still loom over interest rates, as they continue to contribute to a higher inflation rate, while no economic growth can happen while there is not a consistent power supply.
The monetary policy committee (MPC) of the South African Reserve Bank (Sarb) increased the repo rate by 50 basis points instead of a widely expected 25 basis points due to increased risks to the inflation outlook and a weaker rand exchange rate.
The Sarb’s headline inflation forecast for this year is notably higher at 6.0%, compared to the 5.4% expected during the January meeting. This repo rate is now 7.75%, the highest since April 2009.
The Sarb’s 2023 real GDP growth forecast is also little changed at 0.2% and the bank estimates that the current scale of power outages will shave up to 2 percentage points from the country’s economic growth this year.
Jannie Rossouw, visiting professor at the Wits Business School, was one of the few economists who predicted an increase of 50 basis points due to the fact that inflation remains stubbornly high.
He does not think that another repo rate increase will curtail economic growth, as no economic growth can happen without consistent energy supply from Eskom.
Professor Bonke Dumisa, an independent economist, also predicted the 50 basis points increase. He does not see increases stopping soon while the Sarb only predicts that inflation will return to the midpoint by the third or fourth quarter of 2024.
“As long as inflation stays high, the MPC will only believe that it must restrain inflation. I am also concerned that it will give public service employees another chance to make more noise about double-digit increases. If government gives in to their demands, inflation will increase even more as it is pushed up by government-related services.”
Economic research group Oxford Economics Africa said the MPC’s voting patterns show that members are now more concerned about inflationary risks. “We see the Sarb’s current policy path potentially playing out in two ways: first, our revised base case is for interest rates to remain steady at 7.75% for the remainder of the year, with the first series of cuts to come in H1 2024.”
“The second and most plausible scenario in our view is that prices remain stubbornly elevated, fueled by a weaker rand exchange rate and the effects of load shedding and the MPC raises rates by a further 25 basis points during its next policy meeting in late May, 2023.”
Professor Andre Roux, economist at Stellenbosch was also not surprised by the increase.
“The domestic inflation rate remains firmly above the upper end of the target market range of 3 to 6% and this, along with the constitutional mandate to protect the value of the currency, virtually compels the Sarb to impose and adhere to a strict monetary policy, until there is clear evidence that inflationary pressures are subsiding.”
He also points out that the international trend for over a year has been to increase interest rates and should SA fail to follow suit, the rand exchange rate would come under further pressure.
“Not withstanding the constitutional and institutional arguments for a tighter monetary policy, there are equally compelling reasons to support a relaxation.
“With the SA economy being on the verge of a technical recession, along with double-digit food inflation, inordinately high levels of unemployment, high personal debt burdens and persistent load shedding, some leniency is easy to justify. Moreover, there is evidence emerging – globally and locally – that inflationary pressures might be softening.”
Professor Raymond Parsons, economist at North-West University Business School, said with the battle against inflation not yet won. it was inevitable that the MPC would continue with its interest rate raising cycle for now.
He said it was also important to note that the cumulative effects of previous interest rate increases now coincide with an economy seen by many commentators to be on the brink of a possible “technical recession” mainly due to the electricity crises.
Patrick Buthelezi, economist at Sanlam Investments. said: “This possibly marked the top of the hiking cycle but this will hinge on inflation prospects and global developments.
“The bar for policy easing is high and it would require inflation to slow and be sustained towards the mid-point.”
Lee Naik, CEO of TransUnion Africa, said the latest repo rate hike will have a significant impact on the average consumer’s wallet, coming on top of a 325 basis points increase during 2022.
Neil Roets, of Debt Rescue, is concerned that this increase will lead to more South Africans with credit facilities defaulting on their debt.
“People are relying on credit and store cards to put food on the table, refuel their vehicles and pay for transport to get to work.”