Higher rates hurt economy but boost savings

The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) has hiked its key repo rate by 50 basis points to 8.25%, the highest level in 14 years, as it focuses on fighting inflation.

The SARB has now raised rates at ten meetings in a row since November 2021.

The MPC interest rate decision was unanimous because consumer inflation is higher than the top end of the SARB’s inflation target range of 3% to 6% at 6.8% over the year ended April.

The interest rate hike lifted the prime interest rate to 11.75%.

As a result of the rate hike, the rand this week plunged to its weakest against the US dollar at R19.84, which will boost inflation and add to South African consumers’ hardships.

In addition, higher interest rates will slow GDP growth and threaten jobs.

The increase in the repo rate will hurt those with debt, including mortgage bond debt, vehicle debt, and credit card debt but boost those with cash and
needing higher interest on savings, like pensioners.

In addition, consumer debt defaults and business failures are also likely to increase due to the hike in interest rates.

The higher interest rates are worrying amid loadshedding, which is driving up local costs and food inflation.

SARB Governor Lesetja Kganyago said the current repurchase rate policy was restrictive and consistent with elevated inflation and risks.

Previously the bank said its policy was accommodative or supportive of the economy.

“A restrictive repo rate refers to a relatively high interest rate set by a central bank to curb excessive borrowing and spending in the economy,” Anchor Capital wrote in a note.

Kganyago said the policy stance aimed to anchor inflation around the target band’s mid-point and increase confidence in attaining that target.

The SARB increased its forecast for South African GDP growth in 2023 to 0.3% from 0.2% at the previous meeting.

Part of the reason the MPC targeted a 4.5% level of inflation has been to bring about a moderation in inflation expectations.

However, inflation is sticky at around 7%, and the SARB forecasts inflation falling to 4.5% in the second quarter of 2025.

Kganyago said South Africa’s economic conditions remained poor while the global growth outlook had improved.

The SARB assessed the risks from the inflation outlook to the upside as global price inflation remained high despite easing producer and food inflation.

These hawkish views leave the door open for possible future interest rate hikes.

“Overall, it cannot be guaranteed that we have reached the top of the interest rate hiking cycle,” said Kganyago.

“Historically, the hiking cycle has typically ended once it is clear inflation has peaked and is heading towards the intended range.

“We think we are approaching that point,” Sanlam Investments chief economist Arthur Kamp wrote in a note.

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