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Shock as repo rate hiked by 50 basis points – prime rate highest in 13 years
Most economists predicted a hike of 25 basis points, but the SARB's MPC decided on 50.
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Governor of the South African Reserve Bank, Lesetja Kganyago, confirmed on Thursday that the repo rate would be hiked by 50 basis points, with effect from 31 March 2023.
This brings the rate to 7.75%. In January, the repo rate was hiked by 25 basis points to 7.25%. The prime lending rate, which is the rate at which banks lend money to consumers, increases to 11.25%.
This is the highest it has been since 2009, shortly after the 2008 financial collapse.
According to Kganyago, three members of the Monetary Policy Committee voted in favour of a 50 basis points increase while two members voted in favour of a 25 basis points increase.
The repo rate is the rate at which the central bank lends money to commercial banks.
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No easing of difficult conditions
The governor said that South Africans were entering the second quarter of 2023, with sticky inflation, sluggish growth and now elevated financial stability risks which mark the global economy.
“Despite somewhat better growth outcomes in the first months of the year, we see no material easing of difficult global economic conditions,” Kganyago said.
He said that the bank’s forecast for GDP growth was lowered to 0.2% from the 0.3% that they initially expected in January.
More pain ahead?
Kganyago said that the rise in South Africa’s headline inflation rate has been shaped primarily by fuel, electricity and food price inflation.
The governor concluded that economic and financial conditions are expected to remain more volatile for the foreseeable future.
“In this uncertain environment, monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook,” he said.
Lead economist at KPMG, Frank Blackmore, said that the increase in the repo rate was not unexpected given that the most recent inflation rate in February 2023 came in at 7% which is still well above the midpoint of the target range of 3% to 6%. The inflation hike was due mainly to increases in energy, transport and food costs.
“It was the size of the increase that was somewhat unexpected, with the market generally predicting a 25 basis points increase, however it appears reasonable given the upwardly revised inflation forecast of 6% for 2023 from the previous 5.4% made by the SARB,” he said.
“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. This increase in the repo rate follows additional increases made in the US, ECB and BOE among other areas,” he explained.
“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,” he added.
Blackmore believes that SA could even experience a decrease in interest rates by the end of the year, depending on the size and speed of this reduction in inflation over the rest of this year.
