The SA Reserve Bank has raised the repo rate by another 50 basis points (bps) to 8.25% as the country battles myriad problems including rolling blackouts, a stagnant economy and a currency at a record low.
The decision on Thursday by the Bank’s monetary policy committee (MPC) puts the repo rate at levels last seen in the aftermath of the 2007-2008 global financial crisis, after which rates were lowered to boost struggling economies.
The rate was last above 8% in May 2009, fourteen years ago.
The move sees the prime interest rate, which commercial banks use to lend to customers, rising to 11.75%, which is likely to put further pressure on already overburdened South Africans.
The rand tumbled to a record low in the minutes following the decision. Prior to the MPC speech, delivered by Reserve Bank governor Lesetja Kganyago, the rand was about 1% weaker at R19.45/$. Soon after the decision it had fallen more than 2.6% to R19.76. By 4.15pm it had recovered slightly to be 2.1% weaker at R19.67.
All five members of the MPC voted for the 50 bps increase.
Kganyago said load-shedding was having a terrible effect on the economy, with the rolling blackouts expected to cut two percentage points off SA’s economic growth this year.
The Bank now expects SA’s economy grow by 0.3% this year following forecasts of 0.2% in March and 0.3% in January. This is expected to rise to 1% in 2024 and 1.1% in 2025, unchanged from the January MPC meeting.
Kganyago said should alternative sources of energy be found, this would improve growth prospects.
He highlighted food inflation as one of the biggest factors affecting consumer inflation, with the metric now set to average 10.8% in 2023.
Consumer inflation, which has been sticky since global economies opened up following the devastating effects of the Covid-19 pandemic, is now forecast to average 6.2% in 2023. This after forecasts of 6% and 5.5% in March and January.
Core inflation, which excludes volatile food and energy prices, is expected to average 5.3% this year.
Kganyago said there may be some relief for consumers with the oil price having fallen since the last MPC meeting, but this would be somewhat offset by the weaker rand. The Automobile Association recently forecast a drop in fuel prices when the changes come into effect at midnight on Tuesday June 6.
By 7.30pm the rand had fallen the most since November 2021, down 2.57% to R19.79, its weakest ever.
Sanlam fixed-income portfolio manager James Turp said the speech was full of doom and gloom which would have compounded the rand’s losses.
“There's just nothing good in this MPC commentary. So I guess the market just looks at that and says there’s nothing there to make me want to buy immediately,” he said, adding that if the renewable energy in the pipeline became available sooner than expected, this would alleviate conditions.
At this point, however, he said “that’s more of a prayer than actual reality at this point”.
Abdul Jacobs, head of research and portfolio manager at Camissa Asset Management echoed Turp’s concern.
“The recent interest rate increases should have strengthened the rand with higher capital flows into the country,” Davids said.
“But clearly, investors are saying that your currency will continue to weaken because you’re not going to get inflation under control. You will have to continue to raise rates, which will further kill the economy,” he said.
“The reality is that what is driving the rand currently is not the economy. The initial weakness wasn't the economy, it was politics around Russia,” he said, referring to the government’s refusal to acknowledge Russia as an aggressor in its Ukraine invasion.
“The top of the interest-rate hiking cycle is still a way away,” said Davids, adding that the winter months would be difficult for the SA economy as stage 8 load-shedding is likely to permeate the next quarter.
Correction: July 19 2023
This article has been amended to reflect a core inflation forecast of 5.3% for this year.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.