South African Reserve Bank surprises with big interest rate increase

The South African Reserve Bank’s (SARB) monetary policy committee (MPC) voted to increase interest rates by 50 basis points at its meeting today, which brings the repo rate to 7.75%.

Three members of the Committee preferred the announced increase. Two members preferred a 25 basis points increase.

This increase marks the ninth consecutive interest rate increase in the current hiking cycle, which started in November 2021.

This latest interest rate increase brings the country’s prime lending rate to 11.25% – the highest it has been since 2009.

“The revised repurchase rate is now less accommodative and is more consistent with the current view of risks to inflation,” Reserve Bank governor Lesetja Kganyago said.

“The aim of the policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time.”

He said guiding inflation back towards the mid-point of the target band can reduce the economic costs of high inflation and enable lower interest rates in the future.

“Achieving a prudent public debt level, increasing the supply of energy, moderating administered price inflation and keeping wage growth in line with productivity gains would enhance the effectiveness of monetary policy and its transmission to the broader economy.”

Kganyago said 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 MPC will seek to look through temporary price shocks and focus on potential second-round effects and the risks of de-anchoring inflation expectations.”

Higher than expectations

The 50 basis point increase is higher than market expectations. Most experts predicted a 25 basis point hike, with another potential hike by mid-year.

Their expectations were set in light of the country’s latest inflation data, which revealed an unexpected increase in inflation from 6.9% to 7% in February of this year.

Another consideration was the Federal Reserve’s decision last week to increase interest rates by 25 basis points and continue the US’ hiking cycle.

Carmen Nel, an economist and macro strategist for Matrix Fund Managers, said if the Fed had decided to pause, the SARB might have had more scope to become less hawkish.

However, since the Fed followed through with a 25 basis point increase, it forced the SARB’s hand to deliver a 50 basis point hike in this cycle.

Experts are mixed on whether it will be the last interest rate hike in the cycle or whether there is more pain in store – it all depends on inflation.

Efficient Group chief economist Dawie Roodt expected another increase from the central bank by mid-year, should inflation not decline.

“By then, I think we would have reached the end of the cycle. I expect inflation to gradually drift lower after that,” Roodt said.

“By the second half of the year, there is a good possibility that the reserve bank will decide to start cutting interest rates.”

Citadel chief economist Maarten Ackerman shares Roodt’s view, saying sticky inflation may continue the cycle and keep rates high.

However, the 50 basis point increase may signal that that interest rates have hit their peak.

Nel is one of the economists who expects this latest 50 basis point increase to be the last in the current cycle.

Current interest rate cycle