Reserve Bank hikes repo rate for a third time

The South African Reserve Bank’s monetary policy committee has hiked the repo rate for the third consecutive meeting amid war-related inflation shocks.

The bank’s governor, Lesetja Kganyago, announced the committee’s decision on Thursday afternoon. The 25 basis point hike means the repo rate, which affects the cost of borrowing, is now 4.25%.

The decision — which was not unanimous, with two of the five committee members voting for a 50 basis point rise in the repo rate — comes as economies around the world grapple with elevated inflation. 

High inflation has emerged as a stubborn characteristic of the global economy’s recovery from Covid-19’s onslaught. Moscow’s assault on Ukraine has added to existing pandemic-related inflation pressures. Russia is one of the world’s largest oil producers. South Africa imports 30% of its wheat from Russia and Ukraine.

In South Africa, consumer price inflation was 5.7% in February, marking the eighth consecutive month in which inflation was above the Reserve Bank’s 4.5% target. Domestic inflation was largely driven by elevated fuel and food costs.

“Even as the economic impact of the pandemic fades, the outbreak of war in February between Russia and Ukraine is expected to reduce global economic growth and contribute to higher inflation,” the committee’s post-meeting statement read.

“The war will likely impair production of a wide range of energy, food and other commodities and further disrupt global trade.”

On Thursday, Kganyago said the committee’s split decision is an indication of the high levels of economic uncertainty. 

“The economic environment is uncertain. We have got a lot of volatility. We do not know what the central banks in advanced economies will do and in what magnitude,” the governor later said.

“We do not know what the impact of the war in Russia and the Ukraine is going to be. We don’t know whether it is going to be for a few weeks, a few months or for a year. We do not know what the impact will be on the global supply chains and on commodity prices. All of those things matter.”

Kganyago did not comment directly on whether the preference by certain committee members for a 50 basis point hike signals a more hawkish stance by the Reserve Bank. The hike, he said, “tells you the worry that the committee has about the future trajectory of inflation”.

The committee has forecast that oil prices will average $103 a barrel in 2022, before moderating to $80 a barrel in 2023 and $75 a barrel in 2024.

According to the committee’s statement, average surveyed expectations of future inflation have increased to 5.1% for 2022, up from 4.8%. Market-based surveyed expectations for inflation have also increased to 5.5%.

“In the near-term, headline inflation has increased well above the midpoint of the

inflation target band, and is forecast to breach the target range in the second quarter,” the statement notes.

Headline inflation is expected to return close to the 4.5% midpoint in the second quarter of 2023. “Some risks to the inflation outlook, like food and fuel, have been realised, and other risks, such as currency volatility and capital flow reversals, have become more pronounced.”

The Reserve Bank revised South Africa’s economic growth. The country’s GDP is expected to grow by 2% in 2022, up from the 1.7% forecast at the committee’s previous meeting.

“This is due to a combination of factors, including stronger growth in 2021 and higher commodity export prices. Growth in output in the first quarter of this year is likely to be significantly stronger than expected at the time of the January meeting.”

When asked whether he was concerned high interest rates would dampen economic growth, Kganyago said: “Our responsibility as the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth. An economy that is choked can not be balanced, nor can it be sustainable.”

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Sarah Smit
Sarah Smit
Sarah Smit is a general news reporter at the Mail & Guardian. She covers topics relating to labour, corruption and the law.

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