Reserve Bank lifts repo rate 25 basis points to 4% as inflation remains a worry

The SA Reserve Bank raised interest rates for a second consecutive meeting as it moves to normalise policy from historical lows in a context in which a spike in inflation is prompting counterparts in developed markets to do the same.

After a three-day meeting, the monetary policy committee (MPC) lifted the repo rate 25 basis points on Thursday, as predicted by 15 of 16 economists surveyed by Bloomberg. It follows a similar decision at the policy meeting in November, which was the first increase in three years.

The move took the repo rate to 4% in a 4-1 vote, with one committee member voting to keep rates on hold. The MPC said the economy would grow 1.7% in 2022, compared to its previous prediction of 1.8% in November.

The bank revised its headline consumer price inflation forecasts to 4.9% for 2022 (from 4.3%), 4.5% for 2023 (from 4.6%) and 4.5% for 2024, unchanged from November. The rise in these expectations came as Eskom is applying to regulators for a 20.5% increase in prices in April, after upping them by 15% in 2021. 

Bank governor Lesetja Kganyago warned that food price inflation had come in higher than expected of late.

“Over the past year and into this year global supply shortages and strong demand have caused a wide range of prices to accelerate, including raw materials, intermediate inputs and food,” said Kganyago.

Before the announcement the rand was 0.42% firmer at R15.24 but by 4.15pm it had reversed course to be 0.35% weaker at R15.36.

The bank’s decision came a day after the US Federal Reserve provided the clearest indication yet that it was ready to hike interest rates, but stopped short of indicating how aggressive its tightening would be.

The rand weakened as much as 0.9% to the dollar earlier, before recovering, after the Fed said it was likely to begin raising rates in March when it will also wind down its Covid-19 stimulus programme. Fed chair Jerome Powell said it may take longer than expected to tame the rampant inflation, which has accelerated as the US economy opened up after lockdowns imposed due to the Covid-19 pandemic. 

Before the speech, the R2030 government bond had weakened to its worst level in a week, with the yield rising 10 basis points to 9.45%. Following the MPC, it had pulled right back to be up just one basis point at 9.36%. Bond yields move inversely to their prices.

North West University Business School economist Raymond Parsons said the decision was expected, because to uphold the bank’s credibility, “it was inevitable that the MPC would have to raise the repo rate again, given the latest inflation data”.

“Borrowing costs for business and consumers are likely to rise further by the end of this year, with potential implications for levels of confidence,” said Parsons.

BusinessLIVE

Update: January 27 2022
This story has been updated with fresh market data and other information.