More pain ahead as Reserve Bank hikes interest rates by 50bps

South Africans are headed for further financial pain after the Reserve Bank’s monetary policy committee (MPC) decided to raise interest rates by 50 basis points (bps) on Thursday.

The decision takes the new repo rate to 7.75% and the prime rate will rise to 11.25%.

The new rates come into effect on Friday despite two members of the MPC preferring a smaller increase of 25 basis points.

During a media briefing, central bank governor Lesetja Kganyago explained that the decision to raise interest rates by 50 basis points was due to the unstable inflation rate.


According to the latest inflation figures released by Statistics South Africa, there was a slight rise in headline inflation from 6.9% in January to 7% while core inflation surged to 5.2%.

Kganyago said the near-term outlook for core goods and food has led to a significant revision of the headline inflation forecast for 2023, which is now expected to be 6%, up from the earlier forecast of 5.4%.

However, the forecast for 2024 and 2025 shows a decline in food and fuel inflation, resulting in a headline forecast of 4.9% and 4.5%, respectively.

He said despite global food prices falling in dollar terms, local food price inflation is expected to increase due to a weaker exchange rate’s lagged impact.

Consequently, the forecast for food price inflation is 9.9% in 2023, up from the earlier forecast of 7.3%, and 4.5% in 2024, up from 4.4%.

“With core goods and food higher in the near term, headline inflation for 2023 is revised significantly higher to 6% [up from 5.4%],” said Kganyago.

“Despite this, food and fuel inflation are expected to ease, resulting in a headline forecast of 4.9% for 2024 and 4.5% in 2025.

“Local food price inflation is revised up despite global food prices falling in dollar terms, in part due to the lagged impact of the weaker exchange rate. Food price inflation is now expected to be 9.9% in 2023 [up from 7.3%] and 4.5% in 2024 [up from 4.4%].

“Against this backdrop, the MPC decided to increase the repurchase rate by 50 basis points to 7.75% per year with effect from the 31st of March 2023.

“Three members of the committee preferred the announced increase [while] two members preferred a 25 basis points increase.”

According to Zandile Makhoba, consumer economist at Liberty, it is unlikely that this is the last hike because the inflation rate has not yet shown a consistent downward trend.

“We are also seeing continued hikes in the likes of the US and the UK, as they battle with inflation themselves,” said Makhoba.

“The rand has weakened in Q1 2023, which means that the price of imported goods has also increased.” 

Makhoba explained that while higher interest rates can benefit banks by increasing the interest rate margin, [the increase] may discourage consumers from taking on more credit, leading to a decline in loan advances, which is a significant source of banks’ business.

The rate increase also means higher repayments on home loans, which could be challenging for landlords whose rental income does not get adjusted over the 12-month rental period.

This means that if the rental property is still on a mortgage, the rental income margin reduces because more of the rent needs to go toward home loan repayment.

Looking at the hike’s impact on the economy, Makhoba said it is dependent on the type of inflation driving it.

While a rate hike may help ease demand-driven inflation caused by higher consumer spending, it may not help with supply constrained inflation such as that caused by a shortage of goods.

The rate hike can also reduce household disposable income by increasing repayments on existing credit, forcing households to transfer spending from other items to afford loan repayments.

Makhoba said: “Ideally a rate hike should assist in easing inflation. However, this is only the case if inflation is consumption or demand driven, that is it is as a result of higher consumer spending.

“In reality, inflation can also be driven by supply constrains, for example, if there is a shortage of a certain food product, the price for it begins to increase significantly.

“This has been the case with the fuel price as a result of the Russian war on Ukraine. The conflict disrupted oil supply across the world resulting in a shortage and a rise in the Brent crude price.

“When inflation is driven by supply side factors, adjusting interest rates does not always assist in reducing inflation.”

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