World Bank warns about continuing interest rate hikes in South Africa

THE WORLD Bank has warned that South Africa's aggressive interest rate hikes could hamper economic growth prospects, affecting the country's ability to respond to socio-economic challenges.

This comes as the South African Reserve Bank (SARB) on Tuesday indicated that it would continue raising interest rates well into 2023 in a bid to stabilise monetary policy and restore price stability amid persistently high inflation.

Headline inflation in South Africa remains persistently high at 7.6% in August after easing from a 13-year high of 7.8% in July, having breached the upper limit of the Sarb's 3 to 6% target range in May.

This has forced the SARB to adopt a hawkish monetary policy stance, and increase interest rates by 75 basis points in two recent successive meetings, taking cumulative hikes to 275 basis points since the beginning of the tightening cycle in November 2021.

This brought the repo rate to 6.25% last month compared to the average rate of 6.64% prevailing in the year prior to the Covid-19 pandemic.

In its bi-annual publication Africa’s Pulse yesterday, the World Bank said neighbouring economies such as the Namibian had grown slightly on account of good performance of the mining sector, particularly rising output of diamonds, copper, and uranium.

“However, contractionary monetary policy to maintain parity with the South African rand and to fight rising inflation may drag down growth. The twin deficits recorded last year will persist in 2022,” it said.

“The South African economy is projected to weaken further as structural constraints and headwinds persist throughout the forecasting period. Growth will be down to 1.4% in 2023, from 1.9%, and will rebound to 1.8% in 2024. This weak performance is insufficient for the country to address the socio-economic problems of high unemployment and rising inequality.”

However, the World Bank noted that aggressive monetary policy, the decline in commodity prices, and weakness in the domestic demand will drag down inflation over the forecasting period.

According to the SARB, headline inflation is expected to average 6.5% in 2022, up from 4.5% in 2021, and to remain above the midpoint of the target range of 3 to 6% into 2024.

SARB Governor Lesetja Kganyago on Tuesday said if persistently elevated inflation was not brought under control within a reasonable time frame, a prolonged period of higher interest rates could be expected.

“Guiding inflation back towards the target sooner reduces the risk that high inflation gets entrenched,” Kganyago said. “Further normalisation may be needed to raise rates to levels that are consistent with a stable and lower inflation rate.”

Meanwhile the World Bank revised downwards its economic growth forecast for the sub-Saharan Africa region.

The bank said economic growth for the region excluding Angola, Nigeria, and South Africa was projected to slow to 3.8% in 2022, from 4.4% in 2021.

The growth rate was revised down from the forecast of 4.1% made in April, mostly owing to the impact of commodity prices, which varies across countries.

The World Bank said that the global headwinds were slowing Africa's economic growth as countries continued to contend with rising inflation.