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A repo rate hike of 50 basis points (bps) was announced by South African Reserve Bank (Sarb) Governor Lesetja Kganyago just after 3pm yesterday.
The central bank’s Monetary Policy Committee (MPC) surprised the market with a sharper increase than most economists and commentators were expecting — a move that takes the repo rate to 7,75 percent.
The hike comes in the wake of stubbornly high inflation, which came in higher in the latest StatsSA’s reading for February at 7 percent.
Yesterday, Kganyago said three MPC members preferred the announced increase, while two voted for a 25bps increase.
“The revised repurchase (repo) rate is now less accommodative and is more consistent with the current view of risks to inflation. The aim of policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time,” the governor noted.
“Guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future,” he added.
Kganyago said headline inflation breached the upper end of the target range in the second quarter of 2022, however it is forecast to remain above the target until the third quarter of this year.
The Sarb now expects headline inflation to only “sustainably revert to the mid-point of the target range by the fourth quarter of 2024”.
Kganyago again highlighted the major impact of increased load-shedding on the economy, saying yesterday that the Sarb now expects GDP growth for 2023 to come in at 0,2 percent.
This is still more optimistic than forecasts from some major banks and economists, with warnings that SA has slipped into a technical recession.
“The Bank’s forecast for GDP growth is lowered slightly . . . from the 0,3 percent expected in January. As a result of extensive load shedding and logistical constraints, the supply performance of the economy remains severely impaired,” Kganyago said.
“The South African economy contracted by 1,3 percent in the fourth quarter of 2022, considerably worse than expected at the time of the January meeting. The contraction was broad-based, consistent with the extensive load shedding experienced in the final three months of the year.”
“For the whole of last year, GDP growth of 2 percent was achieved, compared to the 2.5 percent previously expected,” Kganyago pointed out earlier in his speech.
“Over the forecast period, we expect household spending and investment to grow modestly, even as load shedding and uncertainty continue to weigh heavily on consumption and investment decisions,” he said.
Despite the Sarb’s further downward revision of its GDP forecast for 2023, it is more optimistic than it was at the January MPC meet about growth prospects for 2024 and 2025.
“The economy is forecast to expand by 1 percent in 2024, up from 0,7 percent, and by 1,1 percent in 2025 (up from 1 percent),” Kganyago said.
“Economic growth has been volatile for some time and prospects for growth appear even more uncertain than normal.”
“An improvement in logistics and a sustained reduction in load shedding or increased energy supply from alternative sources would significantly raise growth,” he added.
The rand firmed against the US dollar, following news of the sharper repo rate hike. However, most economists and property agents expressed surprise at the higher increase.
“The surprise 50bps increase, resulting in a repo rate of 7,75 percent, comes at a time of renewed global volatility, with the strain in the banking sector in developed economies partly due to the post-pandemic interest rate hike cycle,” said Angelika Goliger, chief economist at EY Africa. — Moneyweb.
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