The surprise 50 basis point (bp) hike in the repo rate this week was the right call, most economists said, while conceding their forecasts for a 25bp hike were way off the mark.
Efficient Group economist Dawie Roodt said the higher rates went, the more room the central bank had to keep inflation in check.
“I was also wrong. I also expected 25 pips. But you must remember that the Reserve Bank is privy to information that we don’t have access to. They studied their modelling and came to the conclusion that inflation was going to be an issue for a while. Given their information, this was the right decision,” he said.
“Economists are sensitive beings and when they get things wrong, they take it quite personally. They are trendsetters and tend to blame the other party for making the wrong choice. I don’t take that position and I think the central bank made the right decision,” Roodt said.
Bank governor Lesetja Kganyago, in the monetary policy committee (MPC) statement released on Thursday, referred to “sticky inflation, sluggish growth and now elevated financial stability risks” in the global economy, and added that “despite somewhat better growth outcomes in the first months of the year, we see no material easing of difficult global economic conditions”.
The gloomy message from the governor did not seem to faze economists.
Roodt said: “I’m not too concerned about the general direction [of rates]. We are probably going to see inflation falling off and then going into the target band in the coming months. The worst of inflation is behind us, and the worst of rate hikes is likely behind us.”
The Bank’s inflation target band is 3%-6%, while consumer inflation in February, which is the most recent data, was 7%.
In the MPC statement Kganyago also flagged food price inflation that is now expected to be 9.9% in 2023, up from 7.3%.
Roodt said the argument that the Bank’s decision would trigger rising debt service costs was wrong because higher levels of inflation needed to be kept in check to avert more difficult conditions for households.
Izak Odendaal, investment strategist at Old Mutual Multi-Managers, said given the unexpectedly big jump in rates and the expectation that inflation would decline in coming months, the hike could be the last one, and would pull the real repo rate sharply towards more desirable levels.
But of course, it depends on what happens in the coming months with food prices, the oil price, the rand and, crucially, US interest rates. As a rule of thumb, the faster and higher rates go up, the sooner they will come down again. So, I wouldn't be surprised if they cut or start signalling cuts before year-end
— Izak Odendaal, investment strategist at Old Mutual Multi-Managers
He said the Bank took the view that the rand is more vulnerable given rising global rates and a swing in the current account deficit from a surplus to a deficit.
“I wouldn’t characterise it as controversial. It was just more than most people, myself included, expected. Though inflation surprised to the upside in February, the overall inflation outlook has not deteriorated that much,” he said.
“But of course, it depends on what happens in the coming months with food prices, the oil price, the rand and, crucially, US interest rates. As a rule of thumb, the faster and higher rates go up, the sooner they will come down again. So, I wouldn’t be surprised if they cut or start signalling cuts before year-end,” Odendaal said.
University of the Witwatersrand economist Lumkile Mondi was positive, saying: “It’s not all doom and gloom. It was quite important for the governor, given the crisis in the US and Europe of failing banks, that he reassures South Africans that our banks and their supervisions are strong so that depositors do not panic.”
But North-West University Business School economics professor Raymond Parsons said the extent of the increase in borrowing costs was surprising given the broad uncertainties the MPC itself recognised in its statement.
“The optics of yet much higher interest rates being imposed on an economy that may be on the brink of recession are not good. The question is whether ever-higher interest rates are conducive to the growth South Africa needs to attract foreign direct investment,” said Parsons.
The economy contracted by 1.3% in the fourth quarter of 2022 due to intense load-shedding, which has persisted in the first quarter of 2023.
Kganyago said: “As a result of extensive load-shedding and logistical constraints, the supply performance of the economy remains severely impaired.”
Parsons said a cautious approach by the MPC remained appropriate in light of various economic uncertainties, but “a small mistake in monetary policy could now prove costly”.
Miyelani Mkhabela, founding director and CEO of Antswisa Transaction Advisory Services, said its forecast for the MPC was 50bps, in line with the outcome, and it forecast an additional 75bp increase in 2023.
“There are no signs of repentance from Russia and this has become a permanent crisis causing inflation,” said Mkhabela.
He said the 50bp hike was not controversial and that the MPC was facing complexities that forced the Bank to hike rates.
Kganyago said: “Overall, the risks to the medium-term domestic growth outlook are assessed to be balanced. Nonetheless, the domestic and global outlook appears to be highly sensitive to new shocks. Core inflation remains high in much of the world and financial vulnerabilities have re-emerged to create new headwinds.”
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