Another big hike pushes interest rates to pre-pandemic level

Lesetya Kganyago, president of the Reserve Bank. Image: Deon Raath

  • As expected, the SA Reserve Bank raised interest rates by another 75 basis points on Thursday.
  • Two of the five members of the monetary policy committee voted in favor of a 100 basis point increase.
  • This will further increase the pain in a stressed economy, but the bank must keep up with global rate hikes to keep the rand stable.
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Interest rates returned to pre-pandemic levels after the SA Reserve Bank raised rates by 75 basis points for the second consecutive meeting.

Three members of the monetary policy committee voted in favor of the 75 basis point increase, while two wanted a 100 basis point increase.

The move brings the repo rate to 6.25% and the primary rate to 9.75%. On a new home loan of R2 million, this increases the monthly install by more than R970.

Since November last year, monthly payments on a R2 million home loan are nearly R3 400 more expensive due to a series of rate hikes.

The latest rate hike was in line with economists’ expectations and brings interest rates back to a level last seen in January 2020, before the Reserve Bank made major cuts to support a bloated economy.

On Thursday, SA Reserve Bank Governor Lesetja Kganyago said the risks to the inflation outlook were assessed on the upside.

“As the global producer price and food inflation have eased, Russia’s war in Ukraine continues, negatively impacting global prices. Oil prices have risen sharply since the war began, to around $ 130 a barrel. , and could rise again from today’s level as tensions intensify on the energy markets. Electricity and other administered prices continue to present clear risks in the medium term. “

While rate hikes will boost the struggling South African economy more, the bank is under pressure to keep pace with huge interest rate hikes in other countries, most notably the US, where rates were hiked by 75 on Wednesday. basis points.

Global central banks are rushing to raise interest rates amid an inflationary shock, triggered by the invasion of Ukraine along with supply chain shocks and labor shortages.

South Africa cannot afford to be left behind when it comes to rate hikes, otherwise the rand and local assets such as bonds will lose their appeal to foreign investors who are looking for good yields. Foreign inflows are key to keeping the rand stable. A stable rand is the key to inflation, as South Africa imports nearly all of its oil, which is priced in dollars.

READ | EXPLANATION: South Africans are suffering: Why are interest rates being raised?

The rand is currently under a lot of stress as the dollar is supported by aggressive US rate hikes. It is currently close to R17.80 / $, having started the year below R16.

The Reserve Bank also needs to send a clear signal that it wants to tame inflation.

There remains yet another meeting of the monetary policy committee, in November. Economists expect another rate hike, even though inflation may have peaked. In August, consumer price inflation cooled slightly, to 7.6% from 7.8% in July, thanks largely to falling fuel prices.

Some economists predict another hike in January, with Jeff Schultz, senior economist at BNP Paribas South Africa, predicting the repo rate will peak at 7.00% in January 2023.

“What is bad for the economy right now is the rising cost of living, represented by inflation, and that failure to address inflation now would be bad for the economy across the board,” he said. Kganyago. “And that’s our goal.”

On Thursday, the Reserve Bank downgraded its forecast for South African economic growth to 1.9%, from 2% previously.

The economy is expected to expand 1.4% in 2023 and 1.7% in 2024, above previous projections.

The bank’s forecast for headline inflation for this year is unchanged at 6.5%. But it lowered the inflation forecast for 2023, to 5.3% (down from 5.7%).