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SARB set to raise interest rates by half a percentage

HAWKISH stance expected from the SA Reserve Bank. File photo.

HAWKISH stance expected from the SA Reserve Bank. File photo.

Published May 17, 2022

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THE SOUTH African Reserve Bank (SARB) is now firmly poised to hike interest rates by half a percentage point this week amid continuously rising price pressures.

A majority of economists yesterday warned that the SARB would increase rates by 50 basis points on Thursday as headline inflation was expected to inch up by 6 percent in April to 4.75 percent.

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This will mean that the already high cost of living will prevail for longer for cash-strapped consumers until escalating prices, especially for food stuffs, are brought down to normal levels.

In March, the SARB’s monetary policy committee (MPC) was split when it decided to increase interest rate by 25 basis points to 4.25 percent a year.

Three members of the MPC preferred the announced increase while two members preferred a 50 basis point (bps) rise as inflation outlook was assessed to the upside.

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Alexander Forbes executive chief economist Isaah Mhlanga, yesterday said he believed the MPC would and should increase the rate by 50bps to cope with global financial conditions.

“We expect South Africa inflation to rise above the SARB's upper target of 6 percent driven by fuel, electricity, food and goods prices,” Mhlanga said.

“Further, we expect global financial conditions to tighten faster, resulting in a weaker rand/dollar exchange rate, thus the SARB must normalise in line with the Fed (US Federal Reserve) and other major central banks.”

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If the SARB increases interest rates aggressively, it will be following in the footsteps of rapid policy nominalisation in advanced economies such as the US and the UK.

South Africa’s headline inflation is expected to remain elevated and to print 6 percent in April, up from 5.9 percent, as supply-side price pressures continue to mount and spill over to core items.

Russia’s war in Ukraine has precipitated a rise in global prices, which has seen stagflation risks grow more acute, especially in South Africa.

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Jee-A van der Linde, an economist at Oxford Economics, said inflationary pressures continued to build, with input costs rising at a rapid pace.

Van der Linde said a key point of discussion that had emerged was whether central banks would be able to bring inflation back to target without triggering recessions.

“The abrupt rise in domestic price pressures prompted us to bring our 2022 interest rate forecast forward.

“Specifically, we expect the SARB will lift the repo rate by another 50bps during this week’s meeting, and 25bps increases are slated for the third and fourth quarters, which will see the repo rate end the year at 5.25 percent.”

But a few economists were conservative in their estimates, forecasting that the SARB would not be as aggressive as anticipated.

Absa Corporate and Investment Bank senior economist Miyelani Maluleke said they expected the SARB to increase the repo rate by 25bp to 4.5 percent this week.

Maluleke said they see the risks of a 50bps hike at this meeting as elevated, particularly due to the exchange rate movements since the last MPC meeting.

“However, we firmly believe that aggressive rate hikes are not an appropriate policy response to an inflation shock mainly driven by supply shocks since the monetary policy transmission mechanism works through the demand side,” Maluleke said.

“Notably, analyst consensus has shifted towards a 50bps hike for this MPC meeting, with 16 of the 24 analysts polled by Thomson Reuters last week calling for a 50bp move, while the balance, including ourselves, forecasting a 25bps hike.”

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BUSINESS REPORT ONLINE

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