Consumers will pay more for home loans, vehicle finance and credit cards after the central bank this week hiked the repo rate and further increases expected this year — along with food and fuel price rises — will add to the burden.
The Reserve Bank’s monetary policy committee raised the repo rate by 25 basis points to 4.25%, marking the third consecutive increase since November 2021 when it embarked on a hiking cycle to keep inflation in check.
Three members of the committee backed the announced increase while two wanted a 50-basis-point rise. This was in contrast to the January meeting where four members wanted a 25 bps increase and one wanted the rate to remain unchanged.
Jeffrey Schultz, senior economist at BNP Paribas SA, said the voting showed the MPC was no longer divided about the need for increases and the door was open to a 50 bps hike in May and July.
“We believe that this is an early signal of a change in strategy within the MPC, opening the door for a faster normalisation of rates compared to our already above-consensus forecast. We now forecast the Bank will raise rates by 50 bps in May and July versus our prior 25 bps assumptions,” he said.
Reserve Bank governor Lesetja Kganyago said the repo rate projection from the quarterly projection model remained a broad policy guide, changing from meeting to meeting in response to new data and risks. He said the economic and financial conditions were expected to remain volatile for the foreseeable future.
“In this uncertain environment, policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook,” he said.
FNB economist Mamello Matikinca-Ngwenya interprets the voting of the MPC as a relatively hawkish stance, amid rising inflationary pressures.
She expects the Bank to continue gradually increasing interest rates, with 25 bps adjustments in each of the remaining MPC meetings putting the repo rate at 5.25% by the end of 2022.
However, she said, heightened geopolitical tensions and a resurgence of Covid-19 infections had increased inflation in advanced economies and could prompt quicker than expected policy normalisation.
“This will further lift financial market volatility and raise risk-off sentiment towards emerging markets, and thereby increase pressure to raise rates. As such, the possibility of a more aggressive hike, 50 bps instead of 25 bps, at one or more of the remaining meetings cannot be ruled out, though this is not our base case.”
This will further lift financial market volatility and raise risk-off sentiment towards emerging markets, and thereby increase pressure to raise rates.
Kganyago said the MPC expected the economy to grow by 2% in 2022, revised upwards from 1.7% at the time of the January meeting.
“This is due to a combination of factors, including stronger growth in 2021 and higher commodity export prices. Growth in output in the first quarter of this year is likely to be significantly stronger than expected at the time of the January meeting,” he said.
SA is a producer and exporter of precious metals including platinum and palladium, as well as aluminium and coal, which Russia — now facing sanctions after invading Ukraine — typically exports to European markets.
Prof Raymond Parsons of the North-west University Business School said higher fuel prices would cause slower growth and the MPC’s revised growth forecast for 2022 could be on the optimistic side.
“The jury is still out on whether these improved growth expectations will be realised. And if future interest rate rises are too aggressive, the risk of stagflation will increase. A difficult balance has to be kept. Looking ahead, core inflation and wage growth are the key indicators the MPC is likely to watch in deciding the pace of further rate hikes.”
Kganyago said oil prices had spiked due to the war in Ukraine, with the Bank expecting prices to average $103 a barrel for 2022, $80 in 2023 and $75 in 2024.
He said that due to higher global food prices, local food price inflation had been revised upwards and was now expected to be 6.1% in 2022, up from 4.8%, and 5.1% in 2023, up from 4.6%. Food price inflation is forecast to ease to 4.4% in 2024.
Annabel Bishop, Investec chief economist, said increased prices for oil, wheat and edible oils were fuelling price pressures domestically and keeping SA’s inflation elevated nearer to 6% than 4.5%.
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