The Reserve Bank has increased borrowing costs by more than expected, with a 50 basis-points rise after February consumer inflation came in higher than forecast.
Thursday’s move takes the repo rate to 7.75%, bringing the cumulative increase to 425 bps since it was slashed to 3.5% during the early part of the Covid-19 pandemic in 2020.
Before the rate decision the rand was 0.3% firmer at R18.03/$, while shortly thereafter it had firmed the most in two months, by 1.78% to R17.84, a level last reached in mid-February.
In January the Bank’s monetary policy committee (MPC) slowed the rate at which it had been hiking, with a 25 bps increase, indicating that rates were nearing their peak. While most analysts expected a 25 bps increase, suggesting it could be the last before the rate steadied, the bigger move on Thursday might throw that view off track.
At the January meeting, Bank governor Lesetja Kganyago said it could take as long as 12-18 months for inflation to ease based on the recent hiking cycle, which began in November 2021.
A pivot can only be expected when inflation returns to the mid point of the Bank’s target band of 3%-6%, which is only expected in the fourth quarter of 2023, Kganyago said.
Kganyago once again warned of the threats to the inflation outlook as the prices for food, fuel and energy remained persistently high. That could be blamed, in part, on the continued assault of Ukraine by Russia, which began on February 24 2022, and on the weaker rand.
For 2023, consumer inflation is expected to average 6% from 5.4% in January, while this falls to 4.9% in 2024 from 4.8% previously. The expectation for 2025 is unchanged at 4.5%.
Thursday’s decision was not unanimous, with three members of the MPC preferring the announced increase and two voting to raise by 25 bps.
The MPC said the economy was expected to grow 0.2% in 2023 from its January forecast of 0.3%. For 2022, SA’s economy grew 2%, lower than the 2.5% forecast by the Bank at its last meeting. Kganyago once again highlighted the threat of load-shedding to the outlook as the country grapples with the worst rolling blackouts on record.
The economy is expected to expand 1% in 2024, from the January forecast of 0.7% and November’s 1.4%. In 2025 this rises to 1.1% from 1% previously.
Major central banks including the US Federal Reserve, the European Central Bank and the Bank of England all upped rates in the past couple of weeks as inflation remains a global threat.
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