Neo Ralefeta

Neo Ralefeta

Neo Ralefeta | Treasury Structuring

MPC | South Africa sees biggest interest rate hike since 2002

The South African Reserve Bank (SARB) increased interest rates by 0.75%. 

This move increased the repo rate from 4.75% to 5.50%, and moving the Prime rate from 8.25% to 9.00%.

50 was on the table, 75 was on the table and 100 was on the table.

In the end, three out of the 5 MPC members voted for an interest rate hike of 75bps.

The Governor stated that people across the economy have been complaining about how inflation has been eroding the purchasing power of their income, salaries and wages. 

It is in response to this that the SARB took the decision to go with a larger interest rate hike to protect the incomes of South Africans.

Quoted and agreed prices of goods and services across the economy have continued to occur at levels that exceeded target inflation. This resulted in inflation expectations by economic participants continuing to be on the upside.

Should this trend persist, wage price inflation could begin to spiral. The SARB would then employ more drastic measures to contain higher inflation resulting from higher wages.

While headline inflation is elevated, the SARB is more concerned about the trend of core inflation.

Headline inflation included everything in the inflation basket while core inflation excludes food, fuel and electricity which are seen to be volatile.

A faster increasing change in core inflation suggests upside inflationary pressures to price formation.

The SARB forecasts that core inflation will be above 4.50% (the midpoint of the inflation target band) by the second quarter of 2023 and trend back towards this midpoint by 2024. 

Today’s increase in interest rates is seen to be appropriate when taking into account the state of the economy, risks to the economic outlook and current data that is available to the SARB.

While the SARB is optimistic about GDP growth for 2022 (revised up from 1.70% to 2.00%), it is structural reforms that will unlock the full potential of the South African economy.