The South African Reserve Bank decided to increase the Repo rate (Repurchase Rate) by a further 75bps to 6.25% at its MPC meeting last Thursday. The decision was not unanimous, with two members of the MPC preferring an increase of 100bps. The decision was in line with market expectations, although some analysts had argued that the better-than-expected core inflation data for August (released last week), coupled with Stage 5/6 electricity outages should have encouraged the Bank to hike rates by only 50bps. Instead, the MPC statement highlighted the upside risks to SA inflation and made it clear that the Reserve Bank is committed to getting SA inflation firmly back inside the target range. The fact that two MPC members voted for a hike of 100bps emphasised the hawkish tone of the MPC decision. The Reserve Bank last adjusted interest rates on 21 July 2022, when they increased the Repo rate by 75bps. Since November 2021, the Repo rate has now increased by a total of 275bps. South Africa’s prime interest rate should now increase to 9.75%.
The Reserve Bank once again highlighted the upside risks to SA inflation, which is still focused on a wide range of factors, including food, fuel, and wages, but they also continued to flag concerns about the cost of electricity as well as the potential impact of further currency weakness. The Bank’s forecast for headline inflation in 2022 is unchanged at 6.5% but they revised their 2023 estimate down to 5.3% from 5.7% previously. For 2024, the Bank’s inflation forecast is fractionally lower at 4.6%, down from 4.7% previously. In that regard, it is a little odd that the MPC would highlight that the risks to SA inflation are weighted to the upside, but then revise down their inflation forecast for 2023.
It is also odd that the MPC changed their risk assessment of SA’s economic growth. Back in July, the MPC highlighted that the “risks to SA growth are weighted to the downside”. However, in the latest MPC statement the risks to SA economic growth have been revised to “neutral”, yet SA is experiencing stage 5/6 electricity outages, interest rates have risen further and global growth has weakened. This would suggest that the bank is being too complacent regarding the negative impact of aggressive rate increases on the performance of the SA economy. It is also likely that the MPC has become more beholding to global interest rate developments than the MPC statement would suggest and that “protecting the Rand” is a critical factor in the setting of SA interest rates. The Reserve Bank’s SA GDP growth estimate for 2022 was revised down slightly to 1.9% from 2.0%, while their 2023 estimate was increased fractionally from 1.3% to 1.4%. For 2024, SA GDP growth is forecast at a still modest 1.7%, up from 1.5% previously.
Overall, the latest interest rate decision needs to be viewed within a global interest rate context. It can be argued that SA should not increase interest rates aggressively considering the current weak economic environment, high food and fuel prices (which are difficult for most households to avoid), high unemployment and service delivery constraints. However, the Reserve Bank has repeatedly highlighted their desire to ensure that SA inflation is anchored around the mid-point of the inflation target, and noted that allowing SA inflation to remain above the inflation target unchallenged is unacceptable and would undermine the recent gains in getting inflation expectations lower. Without rate hikes, SA has a high risk of quickly developing a self-reinforcing upward spiral in inflation, driven by wage demands and a weaker exchange rate.
At this stage it seems reasonable to assume that the Reserve Bank is likely to continue to hike rates during the remainder of 2022 (final MPC meeting on the year is scheduled for 24 November 2024) and into early 2023. However, is also seems fair to assume that once inflationary pressures have abated more convincingly, the bank will want to pause and more clearly assess the need for any further rate hikes – especially if SA’s inflation rate is heading towards 4.5% at the end of 2023 and other major central banks are also looking to end their own rate hiking cycle.