Independent Online

Wednesday, June 29, 2022

Like us on FacebookFollow us on TwitterView weather by locationView market indicators

Sarb hikes rates, warns of more to come

Lesetja Kganyago, South Africa's central bank governor. Photographer: Waldo Swiegers/Bloomberg

Lesetja Kganyago, South Africa's central bank governor. Photographer: Waldo Swiegers/Bloomberg

Published May 20, 2022

Share

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. 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.

Story continues below Advertisement

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.

Story continues below Advertisement

“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.”

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.

Story continues below Advertisement

Jeff Schultz, a senior economist at BNP Paribas South Africa, said the SARB had begun to frontload as inflation risks build. He 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 on to 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.

Story continues below Advertisement

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.

BUSINESS REPORT

Share