Reserve Bank raises repo rate to 4%, as expected

On the back of spiking inflation both locally and internationally.
South African Reserve Bank (Sarb) governor Lesetja Kganyago. Image: Moneyweb

As widely expected, South African Reserve Bank (Sarb) governor Lesetja Kganyago announced a 25 basis points increase in the repo rate on Thursday, taking the key rate that it lends to commercial banks to 4%.

This means that the prime lending rate of commercial banks will increase to 7.5%.

The decision follows the conclusion of the Sarb’s first Monetary Policy Committee (MPC) meeting of 2022 and comes on the back of spiking inflation both locally and internationally.

Kganyago said four members of the MPC voted in favour of a 25 basis points hike, while one member vote to hold the rate.

The bank has also flagged “upside risk to the inflation outlook”.

Kganyago also revealed that Sarb now expects SA’s GDP growth rate for 2021 to come in lower at 4.8%, compared to a forecast of 5.2% as its last MPC meeting in November.

“Last year saw the ongoing recovery of the South African economy from the pandemic, but also [saw] the damage caused by the July unrest, cyber attacks and strikes.”

“Those factors led to a downward revision to the growth forecast for the year as a whole, from
the 5.2% forecast in November to 4.8%,” explained.

Read:
SA inflation nears top of central bank target range
Treasury forecasts 2021 GDP growth of 5.1%

“This year and next, economic growth will remain well above a low rate of potential growth. GDP is expected to grow by 1.7% in 2022. The deceleration in growth from 2021 to 2022 is primarily a result of the fading rebound from the pandemic, alongside a climbdown from high export prices. GDP growth is forecast to be 1.8% in 2023 and 2.0% in 2024,” he added.

Kganyago said headline inflation in 2021 came out at 4.5%, with the Sarb’s forecast of headline inflation
for this year (2022) revised higher to 4.9% (from 4.3%).

“Over the past year and into this year, global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs and food.

“Some of these price increases have passed-through to consumer prices in major economies…”

“Oil prices are revised up for this year, and fuel price inflation is higher at 13.7% [up from 4.6%]. Local electricity price inflation for 2021 was 10.2%, while the forecast for 2022 is revised up to 14.5% [from 14.4%] and remains at 12.4% in 2023.”

Read:
Is Eskom getting 20% more, or 40%?
Fuel inflation the biggest risk in Sarb’s repo rate decision

“Global producer price and food price inflation continued to surprise higher in recent months and could do so again. Oil prices increased strongly through 2021 and are up sharply year to date. Current oil prices sit well above forecasted levels for this year. Electricity and other administered prices continue to present short- and medium-term risks,” the governor added.

Commenting on the MPC’s latest repo rate decision, North-West University Business School economist Prof Raymond Parsons acknowledged that the move was widely expected by the markets and economists.

“To uphold the Sarb’s credibility, it was inevitable that the MPC would have to raise the repo rate again given the latest inflation data…

“In a 4-1 majority vote the MPC saw the upside risks to current inflation as the main reason why interest rates should be increased again. Borrowing costs for business and consumers are likely to rise further by the end of this year, with potential implications for levels of confidence,” he added.

“The rising trajectory in borrowing costs for business and consumers in SA this year comes at weak point in the domestic business cycle. Forecasts of GDP growth in SA in 2022 and 2023 are generally below 2%. The MPC itself has again lowered its own 2022 GDP growth forecast from 1.8% to 1.7%,” Parsons point out.

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Has anybody conclusively proven that hiking central rates actually tames inflation?

IMHO it only achieves:
1. Friction on feasibility analysis as the hurdle rate increases. In SA a project now needs an IRR of 18% to be attractive enough, soon to become 20% yet the underlying business is probably only slightly geared and operating numbers still the same.
2. Extra cost for businesses with leverage which cost they will merely try and pass on in higher prices.

It is a bit like Economics theory about people’s choices and trade-offs. Behavioral economics has proven that our varsity assumptions were just assumptions.

I agree for the most part, except your point 1 hints to how it can tame inflation, if the IRR barrier moves up to 20% less projects will come online, less projects = less demand for goods and services to get those projects online.

Yes but fewer projects = less fixed capital formation and less employment? An investor considering a new clothing factory of 500 workers and probably 400m of capex comes to mind. The 500 jobs and the jobs related to that R400m and the 6000sqm factory the business needs and the X per year procurement.

You will not find a growth economy with high real interest rates (ignoring short term effects)

Fair guess is right now SA has a mountain of waiting to invest capital if we look just at JSE total debt minus total cash over time. We are massively cash flush. Outside of JSE at least same amount in private capital.

We would be hard pressed to find over-leveraged under resourced investment private and public companies in January 2022. They all have a fat pipeline but the valves are tight waiting to see what happens in SA politics. Cyril goes that capital goes offshore. Cyril cleans house, cyril prosecutes 20 persons we can all identify right now in 30 minutes, the funds will flow.

funds will flow faster with lower required project IRR which is all based on risk free rate

Frustrating

I actually remember sitting in ECO101 about 20 years ago listening to the lecturer saying higher interest rates will reduce inflation and I thought it was a bit lala..

Anyway – look forward to the price of Woolworths Chuckles coming down on Monday….. 🙂

i like this analysis

End of comments.

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