The South African Reserve Bank has increased the repo rate by 75 basis points, the steepest hike in almost two decades, as elevated inflation and policy tightening abroad bear down on the rand.
While three members of the Reserve Bank’s monetary policy committee (MPC) voted for the 75 basis point hike — bringing the repo rate to 5.5% — one preferred a smaller 50 basis point increase while another wanted a more aggressive 100 basis point hike.
The last time the Reserve Bank hiked by 75 basis points was in September 2002.
In announcing the decision, governor Lesetja Kganyago said: “We believe that the options that we considered were the full range of options to be considered given the current state of the economy and given the current data and the risks to the growth, the inflation and economic economic outlook … We believe that the step that we have taken is appropriate for the state of the economy that we are in right now.”
The hike marks the fifth consecutive increase in the repo rate, which affects the cost of borrowing. In the wake of the MPC’s previous decisions, the Reserve Bank has faced criticism for throwing cold water on South Africa’s already glacial economic growth.
South Africa’s consumer inflation now stands at 7.4%, somewhat lower than in other countries, such as the United States, which last month saw inflation accelerate to its highest rate since 1981. But with domestic inflation now at its highest in more than a decade, and with central banks abroad looking hawkish, the Reserve Bank has had to get more aggressive.
The bank revised its forecast for headline inflation for 2022 higher to 6.5%, from a previous prediction of 5.9%. The MPC expects that inflation will return to the 4.5% midpoint of the bank’s target range by the fourth quarter of 2024.
Central banks around the world are grappling with elevated inflation, driven by supply chokeholds, which has prompted them to become more dogged in hiking rates.
Earlier on Thursday, the European Central Bank dived into its hiking cycle by raising its policy rate by 50 basis points, against earlier guidance that it would hike by a smaller 25 basis points. The move comes well after other major central banks started tightening. The ECB’s decision comes as the eurozone faces an energy crisis triggered by its sanctions against Russia, which continues to wage a war against Ukraine.
The more hawkish attitude of several central banks, including the US Federal Reserve, has been accompanied by an advance in the US dollar and a weakened rand.
“Policy normalisation in major economies and the slowdown in China have contributed
to rand depreciation in recent months,” the MPC said in its statement today, adding that the implied starting point for the rand forecast is R16.10 to the dollar, compared with R15.88 at the time of the May meeting.
Rand weakness, as well as a higher global oil price, contribute to higher expected fuel price inflation for this year at 38.9%, up from 31.2%. Food price inflation was also revised and is now expected to be 7.4% this year, up from 6.6%
“The risks to the inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and may do so again. Russia’s war in Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices. Oil prices increased strongly from the start of the war and may rise further as stresses in energy markets intensify,” the committee said.
Despite headwinds to the global economy, the MPC expects South Africa’s economy to grow by 2%, revised up from 1.7%. It noted in its statement that growth in output in the first quarter of this year surprised to the upside at 1.9%, stronger than the 0.9% expected at the time of the previous meeting.
However, the flooding in KwaZulu-Natal and more extensive load-shedding are expected to result in a contraction of 1.1% in the second quarter. The economy will only miss the 2% growth target if it experiences another contraction later in the year, Kganyago explained.
The Reserve Bank governor noted that failing to deal with inflation now, by raising the repo rate, will cost the economy more down the line. By frontloading hikes, the bank intends to avoid hiking by higher increments “which might actually even choke growth even further”.
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