The Reserve Bank has paved the way for an acceleration in the pace of interest rate hikes as early as May after it tightened policy for a third consecutive meeting.
In a statement after the Bank lifted the repo rate by 25 basis points, governor Lesetja Kganyago said two monetary policy committee (MPC) members voted for a more aggressive stance as policymakers seek to prevent fuel and oil price shocks resulting from Russia’s invasion of Ukraine from entrenching higher inflation expectations.
The MPC’s decision on Thursday to lift the repo rate to 4.25% was in line with forecasts of the overwhelming majority of economists in a Bloomberg survey. What caught the eye was that two out of five members of the MPC wanted to hike rates by 50 basis points, something that was predicted by just one economist in the survey.
The central bank has moved by 25 basis points in each of the past three meetings as it unwound emergency rates that came after the Covid-19 outbreak, when it reduced the repo rate to 3.5%, the lowest official rate in about five decades. Kganyago said the repo rate was still far from what is regarded as neutral, where rates neither help nor hinder growth, meaning the MPC sees room to hike rates further while staying “accommodative”.
The Bank forecast that the repo rate will reach 6.68% at the end of 2024, which is only slightly higher than the 6.50% it was late in 2019, before the pandemic reached SA and prompted a full lockdown in March 2020. The Bank’s changed stance was probably influenced by inflation expectations rising above 5.5% for 2022, moving away from its stated objective of keeping inflation at the midpoint of its 3%-6% target range.
Citi economist Gina Schoeman said a 50-basis-point hike was a possibility at the next meeting in May. It was not a surprise that the Bank, having shifted expectations in the past five years from the upper end to the midpoint of the target, was concerned and ready to act, especially as it has also indicated a preference for a lower target.
“There was no way that they were going to tolerate a supply shock that undoes all their good work,” she said. Schoeman was optimistic on inflation and expected the repo rate to peak at 5.5%, rather than the Bank’s higher estimate. Still, “with everything that’s going on, it would have been strange for them not to sound concerned”.
The rand reached a five-month high on the Bank’s decision, which also came with an upgrade of its GDP growth forecast for 2022 to 2%, from 1.7% previously, before slowing slightly to 1.9% for each of 2023 and 2024. The Bank ramped up its headline consumer price inflation forecast to 5.8% for 2022, from 4.9% previously. It sees it going back to 4.6% in both 2023 and 2024.
Kganyago said the split in the decision “is reflective of the uncertain environment we find ourselves in” and that inflation risks were to the upside.
The rand, which has been among the most resilient emerging-market currencies in the wake of the crisis in Ukraine, extended its gains, rising 1.5% to R14.5345/$ by 7pm, its biggest one-day advance since March 9. It earlier reached its highest level since October. The prospects of higher rates would normally boost the currency as investors bet that the yield advantage of local assets will be maintained.
“The risk we see going forward is that of stagflation — low economic growth or a recession in 2023 combined with high inflation,” said Isaah Mhlanga, chief economist at Alexander Forbes. “The Bank will likely keep raising rates [by] 25 basis points, but we believe they should raise by 50 basis points at the next MPC and 25 basis points at subsequent meetings to create policy room quickly enough while economic growth is strong.”
SA’s bonds, which typically weaken as traders price in tighter policy as that makes their fixed payments less attractive, also strengthened, with the yield on the R2030 note falling 10 basis points to 9.63%. This may indicate that some are not convinced the Bank will maintain its hawkish stance.
“By raising their repo rate, the Bank maintains its growth-friendly stance,” said FNB CEO Jacques Celliers. The Bank “is taking additional steps to combat domestic inflation and to align with higher rates in developed markets”, he said.
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