Hawkish SA Reserve Bank pulls trigger again with 75 basis point rate hike

22 Sep 2022

The South African Reserve Bank (Sarb) delivered its second consecutive 75 basis point rate hike on Thursday, taking its key repo rate to 6.25% and the prime lending rate to 9.75%. Governor Lesetja Kganyago said the ‘rising cost of living’ was detrimental to the economy, and not dealing with this now would have consequences ‘down the line’.

The Sarb’s Monetary Policy Committee (MPC) has now completely moulted from the dove that slashed rates by 300 basis points in 2020 during the Great Lockdown into the plumage of a more familiar hawk.

Two of the five MPC members voted for a 100 basis point hike, three for 75 basis points. This mirrored the size of the US Federal Reserve hike on Wednesday. When it comes to inflation, the Sarb wants to stay ahead of the curve.

“The hawkish surprise was two members of the MPC voting for rate hikes of 100 basis points. While the inflation forecasts themselves are little changed, Sarb appears wary of being too complacent over risks,” said Razia Khan, chief Africa economist at Standard Chartered Bank in London.

In response to media questions after he delivered the statement, Kganyago singled out the rising cost of living as a key cause for concern.

“Rates are in response to economic conditions ... and what we do know is that what is detrimental to the economy at the moment is the rising cost of living, which is depicted through inflation.

“And failure to deal with inflation now would be detrimental to the economy down the line,” Kganyago said.

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Consumer inflation slowed in August to 7.6% from 7.8% in July, but food inflation has continued to accelerate and was 11.5%, or 11.3% if non-alcoholic beverages are included.

“Despite reduced global food price inflation, local food price inflation is revised up and is now expected to be 8.1% in 2022 [up from 7.4%],” the MPC statement said, referring to the forecast average for the year.

“The risks to the inflation outlook are assessed to the upside. While global producer price and food inflation has eased, Russia’s war in Ukraine continues, with adverse effects on global prices.”

That was one of two references in the statement to “Russia’s war in Ukraine”, underscoring the Sarb’s independence from ANC politics. It is indeed “Russia’s war” – and that war is a key driver of the rising cost of living which is adversely impacting ordinary South Africans and forcing the Sarb’s hawkish stance.

On the economic growth front, the Sarb slightly downgraded its 2022 forecast to 1.9% from 2% previously, but if the current upsurge of rolling blackouts persists, that will be shredded by the time of the MPC’s next meeting in November.

The repo rate is now 6.25% and the prime lending rate for consumers is 9.75%, so almost back into more familiar double-digit territory. That’s why it’s called “normalisation”.

The Sarb’s hand is also being forced by the global move to “normalisation”.

The US Federal Reserve on Wednesday lifted rates by 75 basis points as it seeks to tame inflation, which is currently higher in the US than it is in South Africa. The Sarb cannot allow this interest rate gap to narrow because of the negative implications that would have for the rand, which in turn can add more fuel to the inflation fire.

“We cannot ignore the key role that developed market central banks are playing in the domestic policy setting,” Carmen Nel, economist and macro strategist at Matrix Fund Managers, said in a note on the rate decision.

“If [US] Fed chair Jerome Powell slows the pace of hikes, then this would give Sarb room to slow, or even pause the hiking cycle.”

The Sarb is also dancing to the tune of agendas set in Moscow and Washington – and both from different perches are currently hawkish. DM/BM

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