SA Reserve Bank set to pull the trigger again, taking the prime lending rate back above 10%

21 Nov 2022

The South African Reserve Bank is set to raise its key repo rate again this week, with most economists forecasting a hike of at least 75 basis points. This will take the prime lending rate to 10.5%. As policy ‘normalisation’ continues apace in the US and elsewhere, the Reserve Bank has little choice in the matter.

The SA Reserve Bank’s Monetary Policy Committee (MPC) will deliver another big rate hike on Thursday, 24 November, when its last scheduled three-day meeting for 2022 wraps up.

The SA Reserve Bank is determined to keep nipping inflation in the bud with a wary eye on the rand exchange rate, as major central banks worldwide tighten the screws on monetary policy.

Finder.com, a global financial platform, said 90% of the 20 economists, academics and property specialists it polled forecast a hike, with only 10% seeing a hold. And 55% think the hike will be by 75 basis points or more. So, the consensus is for a hike.

Since last November, the MPC has raised interest rates off record lows by 275 basis points, bringing the SA Reserve Bank’s key repo rate to 6.25% and the prime lending rate for consumers to 9.75%. By the end of this week, those rates will likely be 7.0% and 10.5%, or even more.

“We expect the MPC to hike by 100 basis points to align with the Fed’s movements so far,” said Investec economist Lara Hodes.

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The US Federal Reserve has been on a tightening spree not seen since the 1980s. It has raised rates by 75 basis points four consecutive times, bringing short-term borrowing costs to a 3.75% to 4% range from near zero in the space of months.

The curtain has fallen with a thud on the stage of cheap money.

And Susan Collins, who heads the Federal Reserve Bank of Boston, said last week that another 75-basis point rise remained on the cards.

Fed’s Collins: Another 75-bps hike could be ahead | Reuters

Part of the SA Reserve Bank’s mandate is to protect the value of the rand – and, by extension, contain imported inflation pressures. And so it needs to follow suit to retain the appeal of rand-linked assets.

The rand has put in some mild gains of late and was fetching around 17.40/dollar on Monday.

South African consumer inflation has been slowing from a 13-year high of 7.8% in July to 7.5% in September, and data on this front for October will be released on Wednesday. Inflation has hopefully peaked, but it remains uncomfortably above the SA Reserve Bank’s 3% to 6% target range.

The Brent crude oil price was back below $90 a barrel on Monday, but Opec has signalled it is ready to curb production to support prices. Brent oil prices on average in 2022 have been close to $104 a barrel – more than $30 over the 2021 average, according to Statista.

Global food inflation has been waning but prices remain elevated. In both cases, much of the blame rests with Russia’s invasion of Ukraine.

But inflation in South Africa does not have the same causes as inflation in the US and other advanced economies, where fiscal stimulus measures and extremely low unemployment rates have propped up demand, adding to the external price pressures unleashed by the unfolding fiasco in eastern Europe.

With an unemployment rate of almost 34% and an economy that is barely growing – not least because of Eskom’s mounting woes – South Africa hardly has to nip domestic demand pressures in the bud. Retail trade sales have been weak and South Africa’s economy may have tipped into a recession in the last quarter.

Read more in Daily Maverick: "SA’s weak September retail trade sales point to possible recession"

It will be of more than passing interest to see what the SA Reserve Bank’s latest forecasts are for domestic economic growth, especially in light of the depressing fact that rolling blackouts will remain almost a daily affair until Eskom and the Treasury can find cash for diesel.

In September, the SA Reserve Bank forecast growth for 2022 of 1.9%, in line with Treasury’s call, easing to a paltry 1.4% in 2023. Those estimates now look hopelessly optimistic as slowing global growth combines with Eskom to dim the outlook.

It’s not an ideal time to raise rates, but currently there is nothing ideal about the domestic or global economy. If the rand falls out of the acacia tree, no one in the ANC is going to pick it up. DM/BM

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