Repo rate pain not over: Another 75 basis point hike possible next week

Another 75 basis point repo rate increase could be on the cards for next week, due to a weakening rand and aggressive global monetary policy tightening, as well as less currency support from the country’s current account.

The Bureau for Economic Research (BER) at Stellenbosch University changed its expectation that the repo rate will increase by 50 basis points based on these factors, and also quote deputy governor of the South African Reserve Bank (Sarb), Dr Rashad Cassim, who said last week that the Sarb also considers the level of the interest rate relative to what is seen as the neutral rate, that neither slows down nor accelerates general economic activity.

“The current policy rate remains well below the estimated neutral rate, which according to Cassim means that further increases should be seen as ‘easing off the accelerator’ rather than stepping on the brakes,” the BER says in its weekly statement.

The BER expects the pace of policy increases to slow and then halt as the local inflation peak was probably reached in July and lower growth in our trading partners brings downside risks to South Africa’s growth prospects.

However, Sarb governor Lesetja Kganyago, was also quoted as saying last week that it is too early to be confident that South Africa’s inflation has indeed peaked.

According to Stats SA, the South African economy contracted in the second quarter by 0.7% compared to the previous quarter from a downwardly revised, but still robust 1.7% expansion in the first quarter.

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Current account balance unexpectedly reverts to deficit

Meanwhile, the current account balance unexpectedly reverted to a deficit in the second quarter.

According to the Sarb, the current account recorded a deficit of R87bn, equivalent to -1.3% of GDP, after posting a surplus of R157bn in the first quarter (2.4% of GDP).

“Although the deterioration in net exports that drove the trade surplus down contributed to the overall current account shortfall, the biggest factor was the significant South African company dividend payments to large offshore shareholders who own more than 10% of these firms. The second quarter was the first time since 2020 that the current account was in deficit,” the BER says.

In the third quarter, manufacturing production was up 3.7% in July compared to July 2021, although it was off a relatively low base, as unrest and stricter lockdown restrictions derailed economic activity in July 2021.

The other positive figure, the S&P Global SA PMI released last week, remained in expansionary territory during August at 51.7, providing further support for the expectation of a recovery in the broader economy as we move through the third quarter.

“However, as if often the case, it is most unfortunate that load-shedding may again stifle this momentum in September.”

The fall in the RMB/BER Business Confidence Index (BCI) from 42 to 39 in the third quarter was also significant, suggesting that more than six out of ten respondents were unsatisfied with prevailing business conditions. In addition, the FNB/BER Consumer Confidence Index (CCI) rose by just 5 index points to reach -20 in the third quarter, a multi-decade low.

ALSO READ: Inflation ceiling probably reached with 7.8% rate for July

Global repo rates

Global monetary policy tightening is accelerating, the BER says.

In Frankfurt, the European Central Bank Governing Council unanimously raised its key interest rate by 75 basis points to 1.25%, the largest single rate hike ever by the ECB.

The bank expects to raise interest rates further in an effort to return inflation to its 2% target by reducing demand and anchoring expectations.

The ECB also revised its inflation outlook upwardly, citing high food and energy prices resulting from the Russia-Ukraine war, reopening pressures and supply bottlenecks as major upside risks.

In Sydney, the Reserve Bank of Australia (RBA) raised its policy (cash) rate by 50 basis points to 2.35%, the fourth consecutive half-point hike. The RBA also expects to continue tightening, albeit possibly at a reduced pace. The bank expects inflation to average 7.8% in 2022, which would be the highest annual rate in over 30 years and well above the 2-3% inflation target range.

In Ottawa, the Bank of Canada (BoC) raised its key interest rate by 75 basis points to 3.25%, the highest since 2008 and signalled that the rate will climb even further to tame multi-year high inflation and short-term inflation expectations that are both well above their 2% inflation target.

In Santiago, Chile’s central bank raised its benchmark rate by a full percentage point to 10.75%. In pursuing a frontloading strategy, the bank has raised its policy rate by a whopping 925 basis points over the last twelve months.