Reserve Bank hikes lending rate but says rising cost of living is more detrimental to economy

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Reserve bank governor Lesetja Kganyago said upside risks to inflation were pushing up the country’s headline inflation rate and inflation expectations. Photo: Deon Raath
Reserve bank governor Lesetja Kganyago said upside risks to inflation were pushing up the country’s headline inflation rate and inflation expectations. Photo: Deon Raath

BUSINESS


Financial conditions continue to tighten on the back of the Reserve Bank’s hawkish stance on monetary policy, increasing interest rates by 0.75% on Thursday.

This is fifth consecutive hike by the bank’s monetary policy committee (MPC), after inflation soared way above its 3% to 6% target band. The bank expects inflation to return to the mid-range by the second quarter of 2024.

Reserve bank governor Lesetja Kganyago said upside risks to inflation were pushing up the country’s headline inflation rate and inflation expectations.

READ: Inflation eases slightly but rate hike still on the cards

He said: “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.”

The bank’s 0.75% increase pushes the repo rate to 6.25% and the prime lending rate to 9.75%. Kganyago said this level of the repo rate was now closer to the level prevailing before the start of the pandemic.

He added: “The revised repurchase rate path remains supportive of credit demand in the near term, while raising rates to levels more consistent with the current view of inflation risks.”

We have a price stability mandate and that is what drives policy. We look at all other indicators including what is happening to growth

This increase comes on the back of a similar hawkish stance by the US Federal Reserve’s Open Market committee (FOMC). It sharply hiked rates on Wednesday by 0.75% to bring that country’s interest rates within the 3% to 3.25% band. Federal Reserve chair Jerome Powell has forecast raising rates further and faster to bring down a general increase in prices.

He said: “We have got to get inflation behind us. I wish there was a painless way to do that, but there isn’t.”

READ: Business confidence remains depressed

And this is the Reserve Bank’s attitude. Despite some questioning the bank’s hiking rates to stem supply side inflation and adding that this has become a blunt tool, the bank maintains the point is to tame broader inflation into the economy.

“We have a price stability mandate and that is what drives policy. We look at all other indicators including what is happening to growth.

What we do know is what is detrimental to the economy at the moment, is the rising cost of living which is depicted through inflation

"We also look at other indicators that would impact on the South Africa economy that could be from the global side. Rates are in response to economic conditions What we do know is what is detrimental to the economy at the moment, is the rising cost of living which is depicted through inflation and failure to deal with inflation now would be detrimental to the economy down the line,” Kganyago said.

Headline inflation for July slowed to 7.6% from 7.8% in June. Driven food prices which increased more than expected in July wiping away the little gains that would have been, because of the R2 a litre decrease in the petrol price earlier this month.  The food and beverages measurement by Statistics South Africa shows incomes generated by this industry grew by 55.8% in July compared to the same period last year.

Investec’s chief economist Annabel Bishop said the rise in international food prices was a key contributor to surge in local food inflation.

She said:

South Africa is a price taker for most agricultural food produced through either import, or export, parity pricing.

“The month-on-month lift was 3.7%, while a rise of 14.2% year-on-year occurred (Economist food price index), supportive of elevated annual inflation. Indeed, food prices exerted the only contribution increase on the month to the overall CPI, up 0.3% month-on-month or 11.5% year-on-year from 10.1% in July.”  

Increases in interest rates, coupled with load shedding ,were likely to slow growth in the third quarter of this year. The Reserve Bank now expects the economy to grow at 1.9% for 2022. 


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