Reserve Bank announces another interest rate hike

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Lesetja Kganyago.
Lesetja Kganyago.
Picture: Gallo Images/Ziyaad Douglas

The Reserve Bank's monetary policy committee has hiked the repo rate by another 25 basis points to 4%. This brings the prime rate to 7.5%.

Four members of the committee voted for the increase, while one voted for an unchanged rate. 

On a new home loan of R2 million at the prime rate, the monthly payment will increase by around R300 following the rate hike.

After the prime rate went from 10% in 2019 to 7% last year, the bank started hiking rates again in November, with a 25 basis point increase to 7.25%.

While the economy is still struggling to recover following lockdown restrictions last year, the Reserve Bank must contend with hotter inflation. Consumer inflation for the year to December was 5.9% - the biggest increase in almost five years.

On Thursday, the Reserve Bank hiked its forecast of headline inflation for the year, from 4.3% to 4.9% - and Reserve Bank Governor Lesetja Kganyago warned that risks to the inflation outlook are to the upside. 

This is due in part to high oil prices. Last year, the price of 95 unleaded petrol rose from below R15 in inland regions to above R20/litre by December. Diesel rose from R13 to almost R18/litre.

Kganyago also highlighted the risk of higher electricity prices. Eskom has applied for a 20.5% tariff hike.

Other countries are also starting to hike interest rates. If South African interest rates stay too low for too long, this will hit the rand. Traders will move to currencies that earn higher interest.  

"A particular risk arises from the possibility of a faster normalisation of global policy rates than is currently built into the forecast, which assumes some rate hikes to begin around June of 2022," Kganyago said. "Added to this is the risk that quantitative tightening will occur more quickly than previously expected, leading to stronger capital flow reversals from riskier assets such as emerging market debt."

Most economists expect 150 basis point hikes in the next two years, with the market pricing in an increase of around 250 basis points.

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