Reserve Bank Governor Lesetja Kganyago told South Africans on Thursday that the bank’s monetary policy committee (MPC) decided to increase the repo rate by 25 basis points to 4%, with effect from January 28.
The move was in line with market expectations.
Kganyago said four members of the MPC preferred an increase while one member wanted the rate to remain unchanged at 3.5%.
The announcement follows the US Federal Reserve’s decision to keep the policy rate unchanged.
However, for South Africa there were expectations that rates would increase for two reasons: the first being last month’s multi-year high consumer price inflation (CPI) which accelerated to 5.9% year-on-year from 5.5% in November, the highest since March 2017 as well as some expectations that the US Federal Reserve will start its policy interest rate normalisation process (the process of increasing interest rates) in March.
In his MPC statement, Kganyago said that over the past year and into this year, global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs and food.
He said as a result of this, consumer prices in major economies have also been revised higher – 3.1% in both last year and this year, up from 2.9% and 2.4%, respectively.
Kganyago said oil prices were also revised up for this year, with fuel price inflation revised higher at 13.7%, up from 4.6%.
Other upward revisions included local electricity price inflation revised up to 14.5% from 14.4% last year, headline inflation also revised higher to 4.9% from 4.3% for this year and core inflation, which sat at 3.1% last year but revised higher this year from 3.7% to 3.8%.
This is why risks to the inflation outlook have been assessed to the upside, said Kganyago.
He added that global producer price and food price inflation have also continued to come out higher in recent months and could do so again. Kganyago said:
“Electricity and other administered prices continue to present short- and medium-term risks. Given the moderate medium and long-term inflation projections set out above, higher domestic import tariffs, stronger services inflation, and higher wage demands present additional upside risks to the inflation forecast,” said Kganyago.
The governor also warned of a “particular risk” that could further impact inflation, highlighting the “possibility of a faster normalisation of global policy rates. This [rate normalisation risk] is currently built into the forecast which assumes some rate hikes to begin around June this year.
“Added to this is the risk that quantitative tightening which will occur more quickly than previously expected, leading to stronger capital flow reversals from riskier assets such as emerging market debt.” He said:
Kganyago added that the Reserve Bank forecasts also showed that in the near term, headline inflation increased well above the mid-point of the inflation target band, and only returns close to the mid-point in the fourth quarter of this year.
FNB chief economist Mamello Matikinca-Ngwenya told City Press that in its previous statement, the MPC highlighted that given the expected trajectory for headline inflation and upside risks, the committee said a gradual rise in the repo rate would be sufficient to keep inflation expectations well anchored and moderate the future path of interest rates.
Matikinca-Ngwenya said in aligning with this statement, the Reserve Bank’s Quarterly Projection Model projected 25 basis points hikes in each quarter of this year.
“After leaving interest rates unchanged at their historically low level since July 2020, the MPC eventually started the interest rate hiking cycle in November last year – increasing the repo rate by 25 basis points to 3.75%.
“The decision to increase the repo rate was in line with our expectation. At this stage, our view is that in this hiking cycle, the Reserve Bank will likely proceed with caution and avoid choking the ongoing fragile economic recovery, while firmly balancing the need to keep inflation expectations anchored,” she said.
Hugo Pienaar, the Bureau for Economic Research chief economist, said the higher-than-expected CPI print added to the case for a Reserve Bank rate hike.
Pienaar said given a deteriorating outlook for consumer inflation, the bureau predicts three further 25 basis point hikes this year – 1% in total.
Alexander Forbes chief economist Isaah Mhlanga said following the release of Statistics SA’s inflation figures last week that showed that last month’s CPI accelerated to 5.9% year-on-year, the central bank had no choice but to raise rates.
“Not because of this CPI print but because the factors driving CPI up will remain in place and keep it elevated for some time to come and the Reserve Bank must respond.
“The big question is whether supply side driven inflation will pass through to demand pull inflation, through workers demanding higher wages and then spending more with those wages,” he said.
Mhlanga added that the Reserve Bank had indicated 25 basis point increases in the repo rate in each of quarter of this year and next year.