Economists warn consumers in South Africa after interest rate hike

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The South African Reserve Bank’s Monetary Policy Committee (MPC) has raised its repurchase rate (repo) 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%.

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

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

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

While the distribution of votes indicates a more aggressive bias among panelists, the benchmark is now close to 6.36% — the implied rate at the end of 2023 according to the bank’s quarterly projection model, Bloomberg reported.

Kganyago stressed that the model is only a broad policy guide, but it does indicate that the committee is putting its fight against inflation first, and that there may be room to cool the walking cycle, it said.

The central bank wants to anchor inflation expectations more firmly near the 4.5% midpoint of its target range and “increase confidence to meet the inflation target by 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 will do for the rest of the year,” said Carmen Nel, an economist and macroeconomic strategist at Matrix Fund Managers.

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“We would expect a 50 basis point increase in November, but with a risk of tipping to 25 basis points instead of 75 basis points as the edge stabilizes.”

FNB CEO, Jacques Celliers, said: “We are witnessing a concerted effort by the South African Reserve Bank and numerous other central banks around the world to mitigate the effects of higher inflation. While the effects of these actions on consumers may appear negative, the effects of rising inflation are considerably more serious.

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

He noted that the recent FNB/BER Consumer Confidence Index revealed a slight rise in consumer confidence in South Africa, and that consumers have also experienced some relief from the declines in fuel prices. “However, South Africa needs to act quickly to address issues such as intermittent power supply, 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 aggressive rate hikes… This was in line with our and Bloomberg’s consensus expectations. The aggressive rate hike came despite a decline in the economy by 0.7% q/q in 2Q22, reflecting the MPC’s drive to contain medium-term inflation expectations.

“We expect the Reserve Bank to raise the repo rate by 50 basis points at its November MPC meeting and push it to 6.75%, the level where we believe the key rate will peak before falling in early 2024.

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

EY Africa’s chief economist Angelika Goliger said that while inflation has eased slightly from its boiling point, falling to 7.6% in August, it remains high. “It will probably be higher for some time as companies try to make up for margins and restore the differential between consumer and producer prices – which reached 18.0% in July.”

The economist said the SARB, along with the rest of the world, will keep a close eye on the US Fed, whose most recent dot plot shows an aggressive tightening for the remainder of the year, with a price hike of 125 bps by December. 2022.

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

Following the decision by the South African Reserve Bank (SARB) to raise its repo rate by 0.75%, FNB will raise its prime lending rate by 0.75%. From Friday September 23, 2022, the prime rate-linked interest rates will be adjusted.

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

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The SARB’s forecast for global growth has been revised downwards to 3.0% in 2022 and 2.0% in 2023 — compared to 3.3% and 2.5% respectively at the July meeting, Hendrickse said.

The SARB has also lowered its South African growth forecast to 1.9% in 2022 – compared to 2.0% earlier – but revised its 2023 and 2024 forecasts higher.

“Load unloading, the weaker global macro environment and geopolitical risks are expected to counteract growth, but the trend in household spending and investment is more constructive.”

Frank Blackmore, chief economist at KPMG, said inflation, especially of imported goods such as fuel, is unlikely to fall quickly due to the depreciation of the rand. “Besides fuel, inflation is still generally driven by food and energy.”

Investec economist Tertia Jacobs said: “Interestingly, the inflation forecast for 2023 was revised downwards, with both the headline and core forecasts revised from 5.7% (P: 5.7%) and 5.4% (P5.6) %).

“However, the balance of risks to the prognosis remains on the positive side. And this has likely contributed to the hawkishness given a high degree of uncertainty about the persistence of higher inflation going forward. In addition, many international central banks are normalizing monetary policy at a faster pace, with the Fed leading the way and dealing more aggressively with inflation.”


Read: How much more you’ll pay on your bond after South Africa’s latest rate hike

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