Economists send a warning to consumers in South Africa after the rate hike

The South African Reserve Bank’s Monetary Policy Committee (MPC) raised the repurchase rate (repo rate) by 75 basis points.

The increase means that the repo rate will now be 6.25% per annum from September 23, 2022, with Prime now at 9.75%.

The MPC made the decision at its meeting on Wednesday. This was the fifth consecutive increase after a two 25 basis point increase in November and January. The repo rate was increased by 50 basis points at the May meeting. The MPC raised the ante with a 75 basis point hike in the July meeting.

Speaking to the media on Thursday, Reserve Bank Governor Lesetja Kganyago said three MPC members preferred the announced increase.

“Two members preferred a 100 basis point increase,” he said.

Although the split of votes indicates a more aggressive bias among panel members, the benchmark is now close to 6.36%, the implied year-end rate of 2023 according to the bank’s quarterly projection model, Bloomberg reported.

Kganyago pointed out that the model is just broad political guidance, but warns that the committee is anticipating its fight against inflation and that there may be room to cool the hiking cycle, he said.

The central bank wants to anchor inflation expectations more firmly near the 4.5% midpoint of its target range and “increase confidence in reaching the inflation target in 2024,” Kganyago said.

“If inflation continues to moderate, the South African Reserve Bank should be able to slow the pace of the increase, but a lot depends on what the Fed does during the rest of the year,” said Carmen Nel, economist and Macroeconomic strategist of Matrix Fund Managers.

“We would expect a 50 basis point hike in November, but with the risk balance swinging towards 25 basis points instead of 75 basis points if the rand stabilizes.”

FNB CEO Jacques Celliers said, “We are seeing a concerted effort by the South African Reserve Bank and numerous other central banks around the world to mitigate the effects of rising inflation. these actions may seem negative to consumers, the effects of rising inflation are significantly more severe.

“This is the ideal time for consumers and businesses to take advantage of higher investment rates and minimize the use of consumer-driven credit.”

He noted that the recent FNB / BER Consumer Confidence Index revealed a slight increase in consumer confidence in South Africa and that consumers also experienced some relief from falling fuel prices. “However, South Africa needs to act quickly to address issues such as intermittent feeding, which continues to derail the country’s economic growth prospects,” Celliers said.

FNB chief economist Mamello Matikinca-Ngwenya said: “As expected, the Monetary Policy Committee continued with aggressive policy rate hikes … This was in line with our expectations and those of Bloomberg. The aggressive rate hike took place despite the economy’s decline of 0.7% qoq in 22Q22 and reflects the MPC’s push to contain inflation expectations over the medium term.

“We expect the Reserve Bank to raise the repo rate by 50 basis points at the November MPC meeting, pushing it to 6.75%, the level where we believe the policy rate will peak before declining at the beginning of the year. 2024.

“The continuation of aggressive rate hikes is supported in part by an aggressive tightening of global financial conditions, a weaker national currency and domestic wage pressures as workers demand higher wages to offset the higher cost of living,” he said. Matikinca-Ngwenya.

EY Africa chief economist Angelika Goliger said that although inflation has eased slightly, dropping to 7.6% in August, it remains high. “It will likely be high for some time as companies try to recover margins and recover the difference between consumer and producer prices, which reached 18.0% in July.”

The economist said the SARB, along with the rest of the world, will closely follow the US Fed, whose most recent dot plot shows aggressive tightening for the rest of the year, pricing in a 125bp hike by December 2022.

“So we can expect further rate hikes in the last two MPC meetings of the year, perhaps at a similar pace to the US Fed, if inflation doesn’t cool significantly. This will further increase the pressure on consumers in the short term, while it will take some time for higher interest rates to temper inflation.

Following the decision of the South African Reserve Bank (SARB) to raise the repo rate by 0.75%, FNB will increase the primary loan rate by 0.75%. Prime rate linked interest rates will be adjusted starting from Friday 23 September 2022.

In his speech, the Reserve Bank governor characterized the global economy as the beginning of a period of persistently high inflation and weaker economic growth, noted Reza Hendrickse, portfolio manager at PPS Investments.

The SARB forecast for global growth was revised down to 3.0% in 2022 and 2.0% in 2023, compared to 3.3% and 2.5%, respectively, at the July meeting, it has Hendrickse said.

The SARB also revised its forecast for South African growth down to 1.9% in 2022 – up from 2.0% previously – but revised its projections for 2023 and 2024 upwards.

“Burden reduction, weaker global macroeconomic environment and geopolitical risks are expected to remain obstacles to growth, but the trend in household spending and investment is more constructive.”

Frank Blackmore, chief economist at KPMG, said that with the description of the rand, inflation, especially of imported goods such as fuel, is unlikely to fall anytime soon. “In addition to fuel, inflation is still driven by food and energy in general.”

Investec economist Tertia Jacobs said: “Interestingly, inflation forecasts for 2023 have been revised downwards with both major and major forecasts revised from 5.7% (P: 5.7%) and by 5.4% (P5.6%).

“However, the risk balance for the forecast remains to the upside. And this probably contributed to the hawkish attitude in view of a high level of uncertainty about continuing higher inflation in the future. Add to this that many international central banks are normalizing monetary policy at a faster pace, with the Fed setting the tone, tackling inflation more aggressively. “

Read: How much more will you pay on your bond after the last interest rate hike in South Africa