50 basis points repo rate hike ‘appropriate’, say economists

The 50 basis points (bps) repo rate hike was expected and is appropriate, economists say, after this week’s announcement that the monetary policy committee of the Reserve Bank (Sarb) had decided to deviate from the usual 25bps of the past few months.

The rate hike during the May meeting was the first 50 bps rate increase since January 2016.

According to economic research group Oxford Economics Africa, the May meeting was well timed for a larger interest rate increase, as it is the only policy meeting for the second quarter, and the latest data developments point to the annual inflation peaking at the end of the quarter before gradually moderating.

The decision was in line with the consensus view, including its own, the group says.

Oxford Economics Africa also agreed with the decision to revise the real gross domestic product growth forecast for 2022 down to 1.7% from two percent due to the flooding in KwaZulu-Natal and persistent electricity supply constraints.

The group says policy uncertainty and load shedding would continue to undermine South Africa’s potential growth rate, while slowing global growth also posed a threat to the country’s economic recovery.

Oxford Economics also expected that households would increasingly feel the pressures of higher costs, as rising inflation and higher interest rates eroded buying power.

“Stagflation is now our base case for the South African economy in 2022.”

Jee-A van der Linde, economist at the group, says the Sarb had done its bit this round.

“The 50 bps rate rise is considered appropriate, given the latest inflation developments and following the US Fed’s recent 50 bps rate increase.”

The April inflation print of 5.9% compared to April last year showed prices were not running away in SA, although conditions could change quickly in this highly uncertain environment.

Carmen Nel, economist and macro strategist at Matrix Fund Managers, says the hike and reinforcement of the central bank’s inflation-fighting credibility “probably puts the bank ahead of the domestic inflation curve and better aligns the local policy stance to global dynamics”.

Stagflation is now our base case for SA in 2022