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SARB hikes rates and warns: it’s going to get worse before it gets better

THE risks to the inflation outlook are assessed to the upside, says SA Reserve Bank governor Lesetja Kganyago. Picture: David Ritchie, ANA.

THE risks to the inflation outlook are assessed to the upside, says SA Reserve Bank governor Lesetja Kganyago. Picture: David Ritchie, ANA.

Published May 24, 2022

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THE SOUTH African Reserve Bank (SARB) has confirmed the news that no consumer wants to hear: it’s going to get worse before it gets better as the cost of living escalates while economic growth dwindles.

The SARB yesterday confirmed that it would continue raising interest rates this year after it delivered the largest hike in more than six years, accelerating the cost of borrowing even further.

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The bank raised its benchmark lending rate by 50 basis points to 4.75 percent, the fourth consecutive hike and the biggest since January 2016.

This was mainly due to heightened inflation risks stemming from prevailing geopolitical tensions and domestic headwinds from the ongoing energy crisis.

Since the Monetary Policy Committee’s interest rate-raising cycle started in November 2021, the cost of borrowing to business and consumers is now 125 basis points higher.

This means that the prime lending rate will increase to 8.25 percent.

SARB governor Lesetja Kganyago said higher-than-expected inflation had pushed major central banks to accelerate the normalisation of global policy rates, tightening global financial conditions.

Kganyago said oil prices had been revised up further for this year, and fuel price inflation was higher at 31.2 percent, up from 26.1 percent, due to supply side pressures arising from Russia’s war in Ukraine which has seen oil prices settle above $100 per barrel.

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“The risks to the inflation outlook are assessed to the upside. Global producer price and food price inflation continued to surprise higher in recent months and may do so again,” Kganyago said.

“Russia’s war in the Ukraine is likely to persist for the rest of this year and may have significant further effects on global prices.

“Oil prices increased strongly from the start of the war and may rise more as stresses in energy markets intensify.”

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The bank’s forecast of headline inflation for this year was revised higher to the current rate of 5.9 percent, from 5.8 percent, primarily due to the higher food and fuel prices.

“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,” Kganyago said.

Jeff Schultz, a senior economist at BNP Paribas South Africa, said the SARB had begun to front-load as inflation risks build.

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Schultz said the fact that the SARB sees “upside risks” to an already optimistic inflation backdrop was telling on its likely future reaction function.

“Given the SARB’s ‘data dependent’ language and scope for further upside surprises in CPI in coming months, we hold onto our call for another 50 basis points hike to be delivered in July, with the policy rate ending 2022 at 5.75 percent as the bank looks to more aggressively build up policy buffers,” he said.

FNB chief economist Mamello Matikinca-Ngwenya concurred that rates were likely to continue increasing on the back of cumulatively hikes by the US Federal Reserve in just two meetings.

“As such, the SARB should continue to hike rates into next year,” Matikinca-Ngwenya said.

The SARB also lowered its growth forecast, saying the economy was expected to grow by 1.7 percent in 2022, revised down from 2 percent.

“This is due to a combination of short-term factors, including the flooding in KwaZulu-Natal and the continued electricity supply constraints,” Kganyago said.

The risks to the medium-term growth outlook continued to be viewed as balanced, and the economy is forecast to expand by 1.9 percent in both 2023 and 2024.

“At these rates, growth remains well above a low rate of potential, impacted by load shedding, infrastructure and policy constraints,” Kganyago said.

“Investment by the government sector has weakened significantly in recent years and that of public corporations is forecast to be very modest.”

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