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Reserve Bank cranks up repo rate by 75 basis points

The Reserve Bank’s Monetary Policy Committee (MPC) cranked up the benchmark repo rate by 75 basis points to 6.25% on Thursday to rein in consumer inflation which, prior to August, appeared to be hurtling towards 8%.

Three MPC members preferred a 75bp increase, while two preferred a 100bp rise.

Weighing the threat of higher inflation brought on by higher energy costs against the corrosive effects of load shedding on economic growth, the MPC opted to prioritise the inflation threat.

Highlights:

  • Sarb sees SA’s GDP growing by 1.9% in 2022 (from 2% before), 0.4% in Q3 and 0.3% in Q4; 1.4 in 2023 and 1.7% in 2024, above previous estimations.
  • With oil prices currently at around US$91 per barrel – Sarb sees them averaging $105 for 2022; $92 in 2023 and $85 in 2024.
  • Local food price inflation is seen averaging 8.1% in 2022; 5.6% in 2023; and 4.2% in 2024.
  • Headline inflation is seen averaging 6.5% in 2022; 5.3% in 2023; and 4.6% in 2024.
  • Rand depreciated by about 3% against the US dollar since the July MPC meeting.

Rationale

Inflation hit a 13-year high of 7.8% in July before easing to 7.6% in August. That modest reduction did little to mollify the MPC, which opted for an aggressive jump in the repo rate to bring consumer inflation within its 3% to 6% target range.

The graph below explains the problem the MPC must solve. Consumer inflation (the blue line) breached the upper target range of 6% in the second quarter of 2022, and is likely to remain outside the range until the middle of 2023, when food and fuel inflation is expected to moderate. The primary tool used to cool inflation is the repo rate (in green), and it’s been a losing battle as consumer price increases veered dangerously close to 8%.

Inflation vs repo rate

Source: Share Magic

The latest increase in the repo rate follows another 75-basis point increase in July, which took the rate to 5.5%, when energy prices shot up in response to the war in Ukraine, while local electricity and other administered price increases were perceived to present short- to medium-term risks.

Read: Sarb announces sharper 75bp repo rate hike

In a note to clients this week, Capital Economics warned that the recent re-intensification of load shedding and soaring cost of living will weigh on the economy over the coming months.

“…austerity is likely to remain order of the day, further adding to headwinds facing domestic demand. At the same time, external tailwinds will probably fade as the global economy slows. Our forecast for GDP to expand by just 1.8% in 2022 is below the consensus.”

Also weighing on the MPC’s decision was the trajectory of the rand, which traded at R17.60 on Thursday, and appeared poised to challenge its all-time low around R19 to the US dollar, a level reached in May 2020.

The increase in rates is expected to cause pain across the economy.

The prime lending rate is likely to bump from 9% to 9.75%, with mortgage and credit rates squeezing already-beleaguered consumers. That should start to throttle demand for credit, which has already shown signs of plateauing over the last three months, according to Reserve Bank data.

The latest increase in interest rates returns SA to pre-Covid levels, but this time with galloping inflation and countrywide load shedding. Inflation bottomed at 2.1% in June 2020 due to the sharp decline in oil prices and lowering of interest rates to 3.5%, its lowest in decades.


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