‘Bitter medicine’: Reserve Bank raises repo rate 50 basis points

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In the aftermath of the recent rand crash, the South African Reserve Bank’s monetary policy committee (MPC) has lifted the repo rate by 50 basis points — marking the 10th consecutive hike since November 2021. The decision was unanimous. 

The hike has put policy in economically restrictive territory. 

Responding to questions about the financial pain the MPC’s decision will inevitably inflict, Reserve Bank governor Lesetja Kganyago said: “Does it hurt? Yes, in the short term it would hurt. But we have to take the short-term pain in the interest of long-term gain.”

If central banks under-tighten and they are wrong about inflation’s trajectory, they run the risk of losing market trust, Kganyago said. “Failure to act against inflation would mean that we are short-changing the poor … We’ve got to administer this bitter medicine to avoid surgery or being in the intensive care unit.”

Ahead of Thursday’s decision, economists had expected the MPC to take a hawkish stance, given the rand’s recently dismal performance and still sticky inflation. 

Following a crash earlier this month — seemingly prompted by a diplomatic spat with the US over South Africa’s ties with Russia — the rand has remained weak, trading at above R19.30 to the dollar on Thursday before the MPC’s decision. The rand slumped to a new all-time low of R19.63 after the decision.

The MPC raised the implied starting point for the rand forecast to R18.68 to the dollar, compared with R17.80 at the time of its March meeting. “Currency markets are expected to remain volatile and sensitive to idiosyncratic shocks,” its statement said.

Average interest rate levels in major economies are higher than were projected in March, the MPC noted. 

“Tighter global financial conditions raise the risk profiles of economies needing foreign capital, leading generally to weaker currencies. Given upside inflation risks, larger domestic and external financing needs and load-shedding, further currency weakness appears likely.”

Despite inflation remaining uncomfortably high, data released this week suggested that prices are on the decline, easing to an 11-month low in April. The annual rate of inflation slowed more than expected to 6.8%, down from 7.1 % in March, as food prices started to come down from their 14-year highs.

The MPC however revised the local food price inflation forecast higher again, to 10.8% (up from 9.9%) in 2023. This is in part because of the lagged effect of the weaker exchange rate and despite global food prices falling in dollar terms. The committee also revised the headline inflation forecast up to 6.2% (from 6%) for 2023. 

This is despite fuel price inflation now expected to come in lower at -2%, down from the previous forecast of -0.6%. The electricity price forecast is also lower at 11.6% this year.

Risks to the inflation outlook are assessed to the upside, the MPC said in its statement. “Despite the easing of producer price and food inflation, global price inflation remains high. Global oil markets are expected to remain tight, with upside risk to prices. Electricity prices and other administered prices continue to present clear short and medium-term risks.”

It further noted that load-shedding may have broader price effects on the cost of doing business and of living, in particular as diesel consumption increases. According to the Reserve Bank’s monetary policy review, published last month, severe load-shedding could add materially to headline inflation (0.5 percentage points in 2023). 

According to the MPC’s expectations, headline inflation will only return to the midpoint of the Reserve Bank’s 3% to 6% target range by the second quarter of 2025. It previously forecast that inflation would return to the midpoint by the end of 2024.

Meanwhile, the economy has continued to struggle amid a deleterious energy crisis, which the Reserve Bank expects will shave two percentage points from growth in 2023. 

According to the MPC’s new forecast, the economy will grow a mere 0.3% this year, revised slightly higher from a previous forecast of 0.2%. “Economic growth has been volatile for some time and prospects for growth remain uncertain,” the MPC’s statement said. 

“An improvement in logistics and a sustained reduction in load-shedding, or increased energy supply from alternative sources, would significantly raise growth.”

Economists have previously warned that continued rate hikes after Thursday’s MPC decision could lead to over-tightening, exerting too much pressure on the country’s hamstrung economy.

The South African Federation of Trade Unions (Saftu) picketed outside the Reserve Bank building in Pretoria on Thursday in protest against the interest rate hike. In a statement ahead of the picket, the federation criticised the central bank’s policy of inflation targeting, which has seen it raise the cost of borrowing despite already harsh economic conditions.

“Our country is ravaged by high unemployment and poverty and any responsible central bank will not hike interest rates to induce a recession and unemployment. Such a policy path is not only unreasonable, but treasonous,” it said.