The Monetary Policy Committee (MPC) increased the repo rate by 50 basis points to 4.75%, following on from its prior three 25 basis point hikes since embarking on the current hiking cycle.
Four MPC members voted in favour, with one preferring a 25 basis point increase.
The South African Reserve Bank (SARB) once again lowered its forecast for global growth, to 3.5% from 3.7% in March, with the war in Ukraine and the continued spread of Omicron still weighing on economic activity, said Reza Hendrickse, portfolio manager at PPS Investments.
Higher global inflation pressures have accelerated the pace of normalisation in global monetary policy, said Sanisha Packirisamy, an economist at Momentum Investments.
“The increasingly hawkish pivot in the monetary policy stance of major developed market (DM) central banks sparked a bout of risk aversion in perceived riskier emerging market (EM) assets, including the South African rand.
“This, together with upside risks to local headline and underlying inflation starting to materialise, prompted the SA Reserve Bank (SARB) Monetary Policy Committee (MPC) to raise interest rates by the largest increment since January 2016.”
The SARB continues to view risks to the inflation trajectory as being to the upside in the near term, given the threat of sustained higher oil prices and a spillover into food prices, said Packirisamy.
The SARB’s growth forecast for the local economy for 2022 was revised lower from 2% to 1.7%, while its estimates for 2023 and 2024 remained unchanged at 1.9%. The SARB still views risks to its growth projections as being balanced given the potential positive effects of higher commodity export prices.
The SARB revealed that while at the March 2022 rate-setting meeting two members considered raising interest rates by 50 basis points, this time around four members were in favour of the proposed move.
“In our opinion, increased risks to local growth and the prospects for employment creation posed by a severely strained electricity system locally, a concerning slowdown in high-frequency activity data out of China, and diminishing tailwinds from commodity prices.
“(This) may urge the SARB to revert to withdrawing monetary policy accommodation more gradually, by returning to interest rate increments of 25 basis points,” said Packirisamy.
The level of SARB interest rate normalisation are likely to feed through into underlying inflationary pressures in the economy, by stoking higher wage growth and prompting more broad-based price increases outside of food and fuel.
Tatonga Rusike, Sub-Saharan Africa economist at Bank of America, said: “If you are going to go vegan, teetotal, and eat healthily, you are likely to avoid the price pressures at present.”
April inflation data shows that some of the pain points of price increases both month to month and year on year are in meat products, fatty oils, and alcoholic beverages. Bread and cereals pain is still to come.
“It is probably worthwhile to eat fruits and vegetables, at home, and be in touch with loved ones as communication costs fall. Sadly, high fuel price increases and electricity costs are less avoidable, and even higher costs are on their way.”
Breaching the upper limit
The SARB also upped its headline inflation projections for 2022 and 2023 from 5.8% to 5.9% and from 4.6% to 5%, respectively.
“It also revised lower its expectation for domestic economic growth this year, from 1.7% to 2.0%, citing the impact of the KZN floods as well as ongoing electricity supply constraints. The risks to the medium-term growth outlook continues to be viewed as balanced, while inflation on the other hand has been trending higher,” said Hendrickse.
Headline inflation is expected to breach the top end of the inflation target band during the second quarter, the portfolio lead said.
Jeff Schultz, senior economist at BNP Paribas South Africa said that inflation will likely peak out at 6.3% in Q2 this year.
“We currently see CPI peaking closer to 6.8% in Q3 and averaging 6.2% in 2022 – but with growing upside risks as SA fuel prices now look set to climb by 16% m/m in June alone while its food price estimate of 6.6% for this year is also likely to prove too tame, we think.”
He pointed out that the Reserve Bank continues to stick to its view that the current policy stance remains “accommodative”, “reflective of negative real interest rates which will persist over the coming quarters in an environment where global financial conditions are tightening faster than it originally expected”.
“We view the SARB’s May MPC decision and statement as suggestive of an increased degree of concern and prudence by a strong majority of MPC members that inflation could prove a larger problem than initially thought.”
Schultz said that given the SARB’s “data-dependent” language and scope for further upside surprises in CPI in coming months, the bank holds onto its call for another 50bp hike to be delivered in July, with the policy rate ending 2022 at 5.75% vs QPM output of 5.3% and for a terminal policy rate of 6.5% to be reached by mid-2023 as the Reserve Bank looks to more aggressively build up policy buffers.
Small business and farming pressure
The Reserve Bank’s decision means that small businesses will likely have to absorb costs in the short term, as their profit margins are already under pressure due to rising fuel prices and power cuts, said Andiswa Bata, co-head, SME at FNB Commercial.
“Given the direct impact of higher interest rates on cash flow and SMEs’ ability to borrow, many businesses will benefit greatly from the recently launched Bounce Back Loan Scheme, which will have a tangible positive impact on the growth and development of South Africa’s vital SME sector.”
The Bounce Back Loan Scheme initiative is more important than ever for SMEs in terms of long-term economic recovery, said Bata. It will assist SMEs in recovering from the financial impact of the Covid-19 pandemic lockdowns, July 2021 civil unrest, and recent floods in KwaZulu-Natal.
Paul Makube, senior agricultural economist at FNB Agri-Business said that the hike immediately raises the cost of debt and farmers, therefore, face increased debt servicing costs which will erode profit margins.
“The sector has been facing huge input cost pressures due to the war-induced escalation in fertilizer, herbicides, pesticides, and fuel prices. Total agriculture debt stood at R191 billion in 2020 which has increased with an annual compound growth rate of 10.4% in the past five years.”
Further, with fertilizer prices having increased sharply in 2022 farmers will be forced to increase their debt requirements in preparation for the new planting season and subsequently higher debt costs due to rising interest rates, the economist said.