‘SA Reserve Bank has no choice but to increase repo rate’

The SA Reserve Bank (Sarb) will have no choice but to increase the repo rate today after a GDP contraction in the second quarter, with inflation remaining high and high levels of load shedding continuing.

The bank’s Monetary Policy Committee (MPC) members will be keenly aware of the negative impact of supply shocks on the economy when they meet today, said Arthur Kamp, chief economist at Sanlam Investments.

“After all, real GDP contracted 0.7% in the second quarter compared to the first quarter in response to intense electricity supply disruptions and flooding in KwaZulu-Natal,” he said.

“The third quarter continued with severe load shedding that remains a material constraint on production.”

Kamp said it was reasonable to argue economic activity should lift once one-off supply shocks fade, but the tailwind provided by buoyant commodity prices is waning as SA’s terms of trade, although still elevated, decreases in response to weakening global production and recession fears in some countries.

The spike in headline consumer price inflation to an annual increase of 7.8% in July, eroded real personal disposable income growth and households will likely need to borrow more to maintain their spending level in real terms, although there is limited evidence of this to date.

“Admittedly, the annual advance in credit extended to households increased from 5.4% in December 2021 to 7.2% in July 2022. However, after taking inflation into account, household credit is declining in real terms,” said Kamp

He added that despite these developments, the Sarb is unlikely to be deterred from its path of “normalising” monetary policy.