Kganyago defends steep rate increase
• Bank keeps eyes fixed on inflation risks • Hike of 75 bps takes rate back to pre-Covid level
The SA Reserve Bank raised borrowing costs at the steepest rate in two decades for a second consecutive time, returning the repo rate to its January 2020 level before the Bank unleashed an extraordinary stimulus to keep the economy afloat during the Covid pandemic.
The 75 basis point (bps) increase comes despite the Bank reducing its GDP growth forecast for 2022 from 2% in July to 1.9% following a second-quarter contraction.
The stance signals the Bank remains worried about “considerable risk” still attached to forecasts for average salaries, expectations of future inflation and the weakened rand.
Bank governor Lesetja Kganyago told journalists that even though the hike is the consensus view of the monetary policy committee (MPC) in terms of their take on the balance of risks, some members “might prefer that maybe we should be acting faster … but what we have in this statement is the collective view of the committee”. The move was supported by three MPC members, while two members opted for 100 bps.
Kganyago said that the risks to the domestic growth outlook are assessed to be balanced and that while negative global shocks and load-shedding will continue to hurt growth, household spending and investment are more supportive – which is why growth was revised higher for 2023 and 2024 to 1.4% and 1.7%, respectively.
While the call for the hike was anticipated by the majority of economists surveyed by Bloomberg, shortly after the decision was announced the rand, which was 1.3% firmer before the decision, gave back some gains to trade 0.8% stronger at R17.5659/$.
Even though headline inflation expectations for this year were left unchanged at 6.5% and revised lower for 2023 – from
5.7% to 5.3% as a result of lower food, fuel and core inflation forecasts — Kganyago said that the risks to the inflation outlook are assessed to the upside, citing increases in oil prices, electricity and other administered prices.
“Considerable risk still attaches to the forecast for average salaries,” he said.
The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide rather than a forecast, now indicates its key rate will be at 5.6% by year end, close to July’s forecast of 5.61%. The projections are slightly lower for 2023 and 2024 at 6.36% and 6.76%, respectively, down from July forecasts of 6.45% and 6.78%.
HAWKISH
SA’s sixth consecutive rate increase comes in the context of spiking global inflation, which has prompted global central banks to aggressively increase rates. The US Federal Reserve increased interest rates by 75 bps on Wednesday, a total of 300 bps since the beginning of the year and in line with market expectations.
Fed chair Jerome Powell projected further rate hikes of between 100 bps and 125 bps by the end of the year, maintaining a clear hawkish stance.
Stanlib chief economist Kevin Lings said even though the rate decision was in line with market expectations, some analysts had argued that the better-thanexpected core inflation data for August released this week, coupled with stage 5 and 6 electricity outages, should have encouraged the Bank to hike rates by only 50 bps.
“Instead, the MPC statement highlighted the upside risks to SA inflation and made it clear that the Bank is committed to getting inflation firmly back inside the target range. The fact that two MPC members voted for a hike of 100 bps emphasised the hawkish tone of the MPC decision,” he said.
Lings said the Bank might be accused of being “too complacent” about the negative effect of aggressive rate increases on the performance of the economy. “It is also likely that the MPC has become more beholden to global interest rate developments than the MPC statement would suggest and that ‘protecting the rand’ is a critical factor in the setting of SA interest rates,” he said.
FNB chief economist Mamello Matikinca-Ngwenya said the bank expects the repo rate to rise by another 50 bps at the November meeting, pushing it to 6.75%, “the level where we think the policy rate will peak before falling in early 2024”.
She said: “The continuation of aggressive rate increases is partly underpinned by aggressively tightening global financial conditions, the weaker domestic currency and domestic wage pressures as workers demand higher wages to compensate for the higher cost of living.”
DETRIMENTAL
Kganyago pushed back against the criticism that rate hikes may be detrimental to the economy.
“What is detrimental to the economy at the moment is the rising cost of living, which is depicted through inflation. The failure to deal with inflation now would be detrimental to the economy down the line and that is what our focus is.”
The governor also pointed to tightening global financial conditions and the rising risk profiles of economies that need foreign capital.
“Central banks take their decisions from meeting to meeting, depending on changing economic conditions and recalibrating policy accordingly,” he said.
2 MPC members wanted an increase of one percentage point 6.75% the level at which FNB expects the repo rate to peak