Repo rate increase will hurt consumers with debt, but benefit those with savings

The repo rate has been increased by 75 basis points to 5.5%, the steepest hike since September 2002. Most economists believed the repo rate would be increased by only 50 basis points in line with the past few increases, but it seems that after the high inflation rate increase yesterday, it had to happen.

The prime lending rate of the banks will now increase to 9% after South African Reserve Bank (Sarb) governor, Lesetja Kganyago, announced the MPC decision on Thursday afternoon.

The Monetary Policy Committee (MPC) of the Sarb had a difficult decision to make at their fourth meeting of 2022 after the inflation rate increased by 1.1% in June to 7.4%. The difficulty of their decision was reflected in the fact that three MPC members preferred the announced increase, while one member preferred a 100 basis points increase and another a 50 basis point increase.

The latest policy decision of the MPC follows the 50 basis points increase in May and is the fifth consecutive increase. The decision to increase the repo rate was widely expected, but for a 50 basis points increase. The MPC aims to stabilise inflation expectations more firmly around the midpoint of the target band and increase confidence in reaching the inflation target in 2024.

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Revised GDP forecast and inflation

The Sarb revised its real GDP growth forecast for 2022 up to 2.0% from the previous 1.7%, in line with the better than expected growth figures of the first quarter. The central bank also sees risk to South Africa’s medium-term growth outlook as tilted to the downside, with households continuing to suffer under the pressures of higher costs as rising inflation, combined with higher interest rates, erodes buying power.

With the overall inflation situation somewhat changed since the previous policy meeting in May, price pressures continue to build. The higher international oil and food prices prompted the Sarb to revise headline inflation higher to 6.5% in 2022 from 5.9% previously. The bank’s assessment of risks to the inflation outlook remains unchanged to the upside.

He said considering the global economy that has entered a period of persistently high inflation and weaker economic growth, the continuing war in Ukraine, the effect of the war on trade and production and other factors, the Sarb’s forecast for global growth in 2022 is revised down from 3.5% in the May meeting to 3.3% and is lowered to 2.5% (from 2.7%) for 2023 and 2024.

“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. Electricity and other administered prices continue to present short- and medium-term risks. Given below-inflation assumptions for public sector wage growth and higher petrol and food price inflation, considerable risk still attaches to the now elevated nominal wage forecast.”

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The road ahead

Kganyago said the revised repurchase rate path remains supportive of credit demand in the near term, while raising rates to levels consistent with the current view of inflation risks. “The aim of policy is to stabilise inflation expectations more firmly around the mid-point of the target band and to increase confidence of hitting the inflation target in 2024.”

He emphasised that economic and financial conditions are expected to remain more volatile for the foreseeable future and said in this uncertain environment, monetary policy decisions will continue to be data dependent and sensitive to the balance of risks to the outlook.

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More to come

Oxford Economics Africa says an outsized rate increase by the US Fed with a quickening in domestic inflation meant that the Sarb was widely expected to implement another sizeable rate increase during its July MPC meeting.

“Moreover, we expect the Sarb will keep its foot on the accelerator with more policy tightening heading into 2023. A hawkish US Fed and the recent bout of rand weakness imply that the Sarb will be attentive to the risk of capital outflows. Having said that, as economic activity continues to weaken, it will become harder to justify tighter policy. By frontloading rate cuts, the Sarb aims to create scope to be less aggressive down the line.”

ALSO READ: Repo rate spike – Bad for the indebted, good for those with cash to spare

Alarming increase

Neil Roets, CEO of Debt Rescue, says any way you look at it, this alarming hike in the repo rate is a signal to raise the red flags. He said that regardless of the rationale behind the steep interest rate hike and the inevitable increase in living costs that will follow, it is simply unrealistic to place more financial strain on consumers at a time when people are grappling with unbearable financial pressure like never before.

He also warns that many more people will now be looking financial devastation in the eye. “Most frightening is the domino effect this will have on the price of food. We already have 7 million people suffering from chronic hunger and 20 million people are going to bed hungry every night.”

Roets wants to know if we will see half the nation going hungry by the end of the year and says we simply cannot allow this to happen.

ALSO READ: Repo rate increase: more financial pain for consumers

Not too bad

EY Africa Chief Economist, Angelika Goliger, said in response to the announcement that despite the 75 basis points increase, the repo rate remains 75 basis points lower than in February 2020. “In addition, 75 basis points is a relatively small increase in the overall cost of credit.”

She says in Canada, for example, interest rates increased from 0.25% in December 2021 to 2.5% in July 2022, a ten-fold increase which is also substantially above Canada’s pre-Covid rate of 1.75%.

“South African consumers will feel the pinch in terms of bond repayments, store credit and vehicle finance, but this impact is thankfully smaller. The inflation-driven (rate is now at 7.4%) increase in the cost of living is a far bigger issue.”

She says this increase, while painful now, is a sign of a central bank acting credibly to return the inflation rate to their target in order to mitigate the pain of higher inflation down the line.