Reserve Bank hikes repo rate 50 basis points, despite poor growth

The South African Reserve Bank has raised the cost of borrowing by 50 basis points in the hope of bringing down inflation. This is despite the monetary policy committee (MPC) once again clipping its 2023 growth forecast for the country.

Thursday’s increase brings the repo rate to 7.75%. Two of the committee’s five members preferred a 25 basis point hike, which was expected by markets ahead of this week’s MPC meeting.

Asked about the pain the 50 basis point hike stands to inflict, Reserve Bank Governor Lesetja Kganyago emphasised the deleterious effect of inflation on the pockets of the most vulnerable.

“The problem is inflation is eating their income. And if no one does anything about inflation eating their incomes, they are going to be in an even worse position,” he said. “And that institution in society tasked with protecting those incomes against the ravages of inflation is the central bank and through our policy tools, blunt as they might be.”

The Reserve Bank has lifted rates by a cumulative 425 basis points since November 2021 after it slashed the repo to 3.5% in the wake of Covid-19’s economic onslaught. The repo rate is now 125 basis points higher than it was prior to the pandemic.

Higher interest rates will throw cold water on the country’s already slow economic growth. In January, the MPC delivered a dire prognosis of the health of the economy, which the committee forecast would grow only 0.3% in 2023 as households and businesses reel from load-shedding.

On Thursday, the MPC revised its GDP forecast lower to 0.2%, reiterating that the energy crisis stands to shave two percentage points from growth this year. The MPC’s forecast is still higher, although only slightly, than that of the International Monetary Fund, which expects the country’s economy to grow 0.1% in 2023.

But the MPC did have a more positive outlook on growth in the coming years, forecasting that the economy will expand by 1% in 2024 (up from the 0.7% expected in January) and by 1.1% in 2025 (up from 1%). 

“Economic growth has been volatile for some time and prospects for growth appear even more uncertain than normal,” the MPC’s statement noted, adding that improvements in logistics and a sustained reduction in load-shedding would lift growth. 

Meanwhile, the MPC has revised domestic headline inflation higher for 2023 to 6%, up from the 5.4% previously forecast. Data released last week showed that domestic inflation had risen slightly in February, from 6.9% to 7% year-on-year, on the back of higher food prices. 

The committee upped its local food price inflation forecast again, despite global food prices falling in dollar terms, due in part to the lagged effect of the weaker exchange rate. The rand has generally weakened over the past year and currency markets are expected to remain volatile, the MPC noted.

Food price inflation is now expected to be 9.9% in 2023 (up from 7.3%). But food and fuel prices are expected to ease, resulting in headline inflation falling to 4.9% in 2024 and 4.5% in 2025