The South African Reserve Bank’s (SARB’s) Monetary Policy Committee has voted to hike interest rates in the country by 50 basis points, against market expectations.
This will take the repurchase rate to 7.75% and push the prime lending rate to 11.25%.
The latest rate hike marks the ninth hike in the current cycle, with the total adjustment being 425 basis points since the hike cycle started in November 2021.
Rates are now at their highest point in 13 years (June 2009), when the fallout from the global financial crisis weighed on the local currency.
According to Reserve Bank governor Lesetja Kganyago, the hike comes on back of a persistently high inflationary environment, alongside troubles for both local and global economic growth.
The South African economy contracted by 1.3% in the fourth quarter of 2022, considerably worse than the SARB had anticipated back in January. This was due to the persistent load shedding over the period, Kganyago said.
As a result of extensive load shedding and logistical constraints, South Africa’s economic growth is being severely constrained. This is expected to cut two percentage points from economic growth in 2023.
The economy is expected to expand by 1.0% in 2024 and 1.1% in 2025. However, economic growth in 2023 remains on a knife’s edge – and risks persist. Overall, the risks to the growth outlook appear to be balanced, Kganyago said, but he noted that the situation is extremely sensitive to shocks.
For 2023, the Bank’s forecast for GDP growth is at 0.2% from the revised 0.3% expected in January.
“Over the forecast period, we expect household spending and investment to grow modestly, even as load shedding and uncertainty continue to weigh heavily on consumption and investment decisions,” Kganyago said.
Load shedding remains a key risk, threatening to lift costs across the board for South Africans.
The number of days of expected load-shedding in 2023 is at 250 days, 150 days and 100 days, respectively in 2023, 2024, and 2025.
Estimates of the average stages of load-shedding is multiplied by the number of days and then multiplied by the cost to GDP per stage-day. The cost per stage has been revised lower for stages 1 and 2. In nominal terms, these costs vary between R0-R1.2 million for stages 1 and 2 and up to R204-R899 million for stages 3 to 6, when continued on a 24 hour basis on weekdays.
Persistent load shedding is putting pressure on the inflation environment, with the central bank revising its inflation expectations for 2023 upwards to 6.0% from 5.4% before.
The forecast for core inflation is largely unchanged at 5.1% in 2023 – previously, it was 5.2%.
“Risks to the inflation outlook, however, are assessed to the upside. Despite some easing of producer price and food inflation, global price levels remain elevated. Russia’s war in the Ukraine and China’s economic rebound are expected to keep the global oil market relatively tight,” the governor said.
“Electricity prices and other administered prices continue to present clear short and medium-term risks. Domestic food price inflation surprised higher again in February, and risks of drier weather conditions have increased.
“Load shedding may additionally have broader price effects on the cost of doing business and the cost of living, in particular as diesel consumption increases. Given sticky petrol and higher food price inflation, considerable risk still attaches to the forecast for average salaries.”
Inflation is now only expected to sustainably revert to the mid-point of the target range by the fourth quarter of 2024.
Against this backdrop, the committee elected to increase rates by 50 basis points. The vote was three-to-two for the rate, with the balance preferring a 25 basis point hike.
The rate hike was higher than market expectations, where most economists and analysts anticipated a 25bp hike.
Kganyago said that the revised repurchase rate is now less accommodative and is more consistent with the current view of risks to inflation.
“Economic and financial conditions are expected to remain more volatile for the foreseeable future. In this uncertain environment, monetary policy decisions will continue to be data-dependent and sensitive to the balance of risks to the outlook,” he said.
The full statement can be read below: