Raising the REP rate by 50 bp was expected and appropriate, economists say after announcing on Thursday that the Reserve Bank’s Monetary Policy Committee has decided to back down from the usual 25 basis points over the past few months.
The rate increase during the May meeting was the first rate increase of 50 bps since January 2016. According to the Oxford Economics Africa Economic Research Group, the May meeting was well timed for a larger interest rate hike, as it is the only policy meeting for the second quarter, and the latest figures point to an annual inflation peak at the end of the quarter before gradually declining.
The decision of the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) to increase the repo rate by 50 bp. corresponded to consensus views, including his own, the group said.
“Voting materials show that four members of the policy preferred to increase the rate by 50 bps, and one chose to increase by 25 bps. Sarb has raised its stakes by 125 bps since it began its marching cycle in late 2021. ”
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Oxford Economics Africa also agrees with the decision to revise the forecast for real GDP growth in 2022 to 1.7% from 2.0% due to flooding in KwaZulu-Natal and persistent restrictions on electricity supplies.
“This is more in line with our view that real GDP growth is likely to decline to 1.5% this year (vs. 4.9% in 2021) due to rising inflation and tighter monetary policy in addition to short-term factors ».
The group says political uncertainty and declining pressures will continue to undermine South Africa’s potential growth rates, while slowing global growth also poses a threat to the country’s economic recovery.
Oxford Economics also expects households to feel more pressure due to rising costs as rising inflation and higher interest rates undermine purchasing power. “Stagflation is now our baseline option for the South African economy in 2022.”
G-A van der Linde, the group’s economist, says Sarb did his part in this round. “Raising the rate by 50 bps is considered appropriate, given recent developments in inflation and the recent increase in the Fed’s rate by 50 bps.
April inflation of 5.9% compared to April last year shows that prices in South Africa are not disappearing, although conditions may change rapidly in this very uncertain situation.
The group also expects higher rates to rise in the third and fourth quarters, with policy decisions still dependent on data with a forecast that the repo rate will end at 5.25%.
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Inflation and the repo rate
Professor Gianni Rossov also expected a high rise in repo rates and said this suggests that Sarb is concerned about meeting inflation expectations. “Sarb saw what happened to the US Federal Reserve and learned a lesson from it.”
He says the repo rate could be increased further if inflation continues to rise rapidly. “I’m worried about the infrastructure being destroyed.”
Carmen Nell, an economist and macro strategist at Matrix Fund Managers, also says the increase was in line with consensus expectations and market prices. “Sarb is certainly aware of the risks of declining growth, but much of the fragility lies outside of monetary policy.
“Weak growth potential is driven by persistent and pervasive constraints such as electricity as well as cyclical weakness due to flooding. In any case, SARB is concerned that soaring prices will hurt growth by limiting consumer power, especially for the poor. ”
She says that while she disagrees with some views that the SARB has lagged behind the domestic inflation curve, there was a certain risk that the SARB would lag behind the global monetary policy curve.
“Today’s growth and strengthening of the central bank’s authority in the fight against inflation is likely to put the bank ahead of the domestic inflation curve and better match the position of local policy with global dynamics.”
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Markets are not against the increase
Nell also notes that this view has been confirmed by the price action in the market. “Rand and domestic bonds have responded positively to the results, suggesting that the level of political interest rates is not yet a concern for growth prospects. Rather, Sarb’s prudent approach in the face of increased inflationary risks should reduce the premium for the risk inherent in SA’s asset prices ”.
Jeff Schultz, senior economist at BNP Paribas South Africa, says today’s increase was largely due to inflation. “The materialization of the risk of rising inflation through food, fuel and some growing evidence of wider second-tier pressure, which is creeping in prices, means that now Sarb does not see the CPI return to its average 4.5% target on a regular basis to end of 2024 point of view with which we agree ”.
He says Sarb’s split decision on the size of the rate hike still indicates that he still relates to growth concerns. “However, only small revisions to lower the GDP forecast for 2022 (-0.3 percentage points to 1.7%) and maintaining growth at 1.9% in recent years indicate that she believes that the economy more resilient than we expect. “
Schultz says Sarb’s assertion that risks to growth prospects are balanced, given the growing nuances of global growth, is interesting and suggests that the central bank is now more focused on the risks of inflation that are beginning than on the still opaque global background. growth.
“Given the data-dependent Sarb language and the potential for further surprises in the CPI in the coming months, we are committed to our call for another 50 bp increase to be made in July, with a fuel rate of 2022. 5.75% compared to the QPM yield of 5.3% and to reach a terminal rate of 6.5% by mid-2023 as the bank will be more aggressive in increasing policy buffers ”.