The South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) raised the benchmark repurchase rate by 25 basis points to 4% during its January 2022 meeting as predicted by 15 of 16 economists surveyed by Bloomberg.
This means that the prime lending rate of commercial banks will increase to 7.50%. This marks only the second interest rate hike in three years as inflation remains a huge concern and despite the economy still recovering from the fourth wave of Covid-19 infections driven by the Omicron variant.
Four out of five committee members voted in favour of the rate hike, while the GDP growth forecast was kept unchanged at 1.70% for 2022 and 1.80% for 2023. Officials also noted that the possibility of a faster normalisation of global policy rates poses a grave risk.
The Bank revised its headline consumer price inflation forecasts to 4.90% for 2022, 4.50% for 2023 and 4.50% for 2024, unchanged from the previous meeting. The upward revisions in these expectations came as Eskom plans to increase its prices by 20.50% in April 2022, following a 15% increase in 2021.
The local equity market was 0.57% lower at 16h00, trading at 73 377.68 points as interest-sensitive stocks dampened sentiment. Hammerson, Sasol and Steinhoff were the biggest winners in afternoon trade, logging gains of between 3% to 6%, while Harmony Gold Mining, AngloGold Ashanti and Alphamin Resources fared worse.
Shortly after the decision was announced, the rand was flat at R15.30/$, having traded at R15.24 just before the announcement. Prior to the speech the R2030 government bond had declined to its worst level in seven days, with the yield rising 10 basis points to 9.45%. Following the announcement, it pulled back to 9.36% at 16h00.
“The increase in interest rates was broadly in line with our expectations”, says Pask. “Especially after the case for a rate hike grew last week when inflation data for December 2022 came in higher than expected at 5.90%, close to the top of the bank’s 3%-6% target range”.
“However, we have previously communicated that should the MPC decide to raise borrowing costs to contain prices, the changes will most likely be small and gradual”.
Pask concludes, “A 25 basis point hike every few months, will not be a shock for economic growth or the local market. Market participants will continue to be sensitive to any developments relating to unemployment, wages, inflation, and interest rates, therefore investors should also expect heightened volatility over the next few months”.
ENDS
