Chief Economist at Citadel, Maarten Ackerman says the Reserve Bank’s Monetary Policy Committee’s decision to increase rates by 50 basis points is aggressive.
The move takes the repurchase rate to 8.25%, and the prime lending rate by the banks to 11,75%.
The Bank notes that given the upside risks to inflation, larger domestic and external financing needs, and rolling blackouts, further currency weakness appears likely.
The announcement brings the total value of rate hikes since November 2021 to 475 basis points.
Ackerman says, “If we look at the weakness in the rand dropping by more than 30c on the announcement, there’s probably more pain in the pipeline. Add to that the fact that the Reserve Bank expects load shedding is shaving off 2% from economic growth, that places SA almost where there is no growth. And in fact, one can argue that we’re already in a recession, so we need to ask the question of whether is going to be successful in hiking interest rates this aggressively.”
The Reserve Bank has upped its economic growth prediction for this year from 0.2% to 0.3%, noting that energy and logistical constraints remain binding on South Africa’s growth outlook, with load shedding expectations to shave off 2% points from growth.
Inflation outlook
Reserve Bank Governor Lesetja Kganyago says risks to the inflation outlook are assessed to the upside with headline inflation for 2023 revised up from 6% to 6.2%.
“Against this backdrop, the MPC decided to increase the repurchase rate by 50 basis points to 8.25% per year, with effect from the 26th of May 2023. The decision was unanimous. At the current repurchase rate level, the policy is restrictive, consistent with elevated inflation and risks.”
Indebted consumers
Another interest rate hike means that indebted consumers with credit cards, vehicle debt, personal loans and home loans will have to pay more interest on that debt.
Repayments on an R1 Million house have increased from R 7750 since November 2021 to just over R 10 800 to date. That is an increase of R 3000 in two years.
The Deputy Governor and CEO of the Prudential Authority, Fundi Tshazibana says, “Regarding the impact on borrowers we have done work as the SARB a while ago also looking at who borrows, we remain of the view that if one looks at the velour in South Africa, most of those people are not borrowing actively in debt markets, but where there is borrowing it’s not necessarily the decision by the MPC but how lenders, banks themselves, perceive the risk of lending to those individuals.”
The bank notes that headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year.
VIDEO: South African Reserve Bank announces interest rate decision:
