Why the SA Reserve Bank hike took the market by surprise

The South African Reserve Bank (SARB) announced a 50 basis point repo rate increase on Thursday, 30 March – 25 basis points more than the market expected.

An interest rate hike was a near-inevitable outcome given the recent rise of inflation and the Federal Reserve’s interest rate hike last week.

However, the market did not expect the SARB to announce such a significant increase in the repo rate.

This decision from the reserve bank was particularly surprising considering its previous interest rate announcement.

In January, the market expected a 50 basis point increase and was surprised when the SARB announced a dovish 25 basis point interest rate hike.

Matrix Fund Managers economist and macro strategist Carmen Nel said the SARB’s latest hike shows that this January outcome was the anomaly and that the reserve bank is now firmly in “orthodox mode”.

Before the announcement on Thursday, Nel told Daily Investor that she, like many economists, expected a 25 basis point increase from the Monetary Policy Committee.

However, she said numerous recent events could impact inflation, leading the SARB to tighten the reins further with a 50 basis point hike.

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From dove to hawk

One major factor in the SARB’s decision was the inflation outcomes for January and February, which were higher than expected. 

SARB governor Lesetja Kganyago said in his MPC statement on Thursday that the rise in the country’s headline inflation rate has been driven primarily by fuel, electricity, and food price inflation.

These factors resulted in the country’s inflation rate rising from 6.9% to 7.0% in February.

This puts inflation well above the SARB’s target band of 3% to 6% and could explain the Reserve Bank’s hawkish approach to the interest rate on Thursday.

The weak rand, under immense pressure since the start of the year, has also reintroduced upside risks to headline and core inflation – something the SARB would likely want to curb as soon as possible.

As expected, the rand has already reacted to Thursday’s hike announcement, rallying afterwards and rising nearly 2% against the dollar.

Continued load-shedding also presents an upside risk to inflation, according to the SARB, which views the electricity crisis as inflationary rather than deflationary.

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Nel said that, given the upside risks to inflation, the SARB’s hawkish interest rate hike could be viewed as a risk management exercise.

By hiking the interest rate, the SARB is attempting to “buy some insurance” for ongoing global market volatility.

The governor confirmed this on Thursday, saying the revised repo rate is now “less accommodative and is more consistent with the current view of risks to inflation”. 

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

Efficient Group chief economist Dawie Roodt said in an interview on Jacaranda FM that he did not expect such a high interest rate hike on Thursday but understands why the SARB made this decision.

He explained that it is better for the Reserve Bank to get inflation under control now rather than suffer the consequences of trying to do so later.

Kganyago affirmed Roodt’s view, saying, “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”.

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What happens now?

Generally, the MPC’s unpredictability is not good for investor confidence, and this latest surprise decision seems to have left the market unsure of what to expect next. 

Some experts expected this hike to be the last in the current hiking cycle, which has been ongoing since November 2021.

However, the SARB’s latest decision could indicate a tendency towards a more strict monetary policy in the coming year.

“Ahead of this decision, the consensus view was that Thursday’s move would mark the end of the hiking cycle, but the road ahead is precarious as a lift in the cost of doing business and a weaker rand-dollar exchange rate should support stubborn inflation in South Africa,” said FNB chief economist Mamello Matikinca-Ngwenya. 

“Nevertheless, interest rates are likely to remain elevated over the medium term, as escalated geopolitical tensions, the cleaner energy drive, and adverse weather patterns, keep global inflation above pre-pandemic levels.”

Professor Andre Roux, an economist at Stellenbosch Business School, predicts one more interest rate hike in May, followed by a sideways movement until the latter part of this year or early next year, when rates could start moving downwards.

He said high inflation and the SARB’s Constitutional mandate to protect the value of the country’s currency “virtually compels” the reserve bank to impose and adhere to a strict monetary policy “until such time that there is clear evidence that inflationary pressures are subsiding”.

The effectiveness of the SARB’s latest hike to curb inflation will therefore determine whether South Africa has reached the end of its hiking cycle yet.