South African consumers were left stunned on Thursday after South African Reserve Bank Governor Lesetja Kganyago hiked the repurchase rate in the country by a whopping 50 basis points.
This meant that the repo rate will now move from 7.25% to 7.75%, with the prime lending rate in South Africa moving from 10.75% to 11.25%.
The central bank has been on an aggressive trend of hiking the rate in a bid to help curb inflation, which saw the previous eight meetings by the committee voting for an increase.
The Reserve Bank has now raised rates for the ninth time in a row, adding a total of 425 bps to the repo rate since it began tightening policy in November 2021 to tame inflation.
Inflation, however, is still higher than the bank’s target range, as the economy has been impacted heavily by the rolling power cuts imposed on the country by ailing state-owned power utility Eskom.
The five-member Monetary Policy Committee (MPC) was split 3-2 in its decision, with three members preferring a 50 bps increase and two wanting a 25 bps rate increase.
Frank Blackmore, lead economist at KPMG, told Business Report: “This increase in the repo rate was not unexpected given that the most recent inflation read (February 2023) came in at 7% which is still well above the midpoint of the target range of 3% to 6%, due mainly to increases in energy, transport and food costs.
“The size of the increase was somewhat unexpected, with the market generally predicting a 25bps increase. However it appears reasonable given the upwardly revised inflation forecast of 6% for 2023 from the previous 5.4% made by the SARB.”
Blackmore added: “Although energy price inflation has subsided over the past few months, food prices continue to increase as farmers and food producers internalise their additional expenditures on alternative energy resources to ensure the cold chain remains unbroken given the continued cycle of load shedding experienced across the country.
“In addition, the depreciation of the exchange rand has added to food price pressures.”
He went on to say that this increase in the repo rate followed additional increases made in the US, the European Central Bank and the Bank of England, among other areas.
“We expect the SARB is at or approaching the peak of their monetary policy tightening cycle and that more significant decreases in inflation to take place over the second part of the year when base effects are more likely to come into effect, conditional on no further shocks to underlying food and energy prices.
“Depending on the size and speed of this reduction in inflation over the rest of this year, we could even experience a decrease in interest rates by the end of the year,” Blackmore said.
BUSINESS REPORT