Are your repayments going to increase? What to expect from repo rate decision
· Citizen
With the South African Reserve Bank’s (Sarb) next repo rate decision just days away, economists expect the Monetary Policy Committee (MPC) to keep the repo rate unchanged following its pre-emptive 25-basis-point rate hike in May.
However, a small but growing risk of another increase remains as inflationary pressures persist, with economists expecting June inflation to reach 4.7%, up from 4.5% in May. It has been argued that the rise in consumer prices is driven largely by external shocks, particularly higher fuel prices stemming from the conflict in the Middle East.
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The Sarb hikes the repo rate primarily to keep inflation under control and maintain price stability. However, this approach is most effective when inflation rises because people and businesses spend too much.
Sarb will likely hold repo rate at 7.00%
Senior research fellow at the University of Johannesburg’s School of Economics, Dr Charles S Saba, told The Citizen that it would be preferable for the Reserve Bank to hold the repo rate at 7.00% in July while maintaining a hawkish stance, as inflation pressures are supply-driven rather than demand-driven.
“Much of the recent inflation pressure is supply-driven, originating from global oil prices rather than excessive domestic demand,” he said. “Higher interest rates cannot reopen the Strait of Hormuz or reduce international crude-oil prices, but they can weaken already modest economic growth and increase household and business debt-servicing costs.”
His comment follows Bank of America’s forecast of a 25-basis-point hike in July, which he said is “credible, but the decision is finely balanced”.
Only way for Sarb to hike repo rate
Saba added that a 25-basis-point hike would be justifiable if June inflation is significantly higher than expected, the rand depreciates sharply, or higher fuel costs begin to spread persistently into core inflation.
“Therefore, a data-dependent pause would presently provide the most appropriate balance between price stability and economic growth,” he said.
Dr Bonke Dumisa, an independent economic analyst, told The Citizen there is a 50% chance the Sarb will hike.
“The Sarb has tended to raise the repo rate because of their normal ultra conservative leanings. But there is an outside chance that the Sarb may reluctantly keep the repo rate unchanged, given that the inflation expectations now in July are no longer as high as they were in April and May, though still there, but not as high.”
Repo rate hike to prevent inflation
Tertia Jacobs, treasury economist and fixed-income specialist at Investec, told The Citizen that the Sarb can hike the repo rate due to the Bureau for Economic Research’s second-quarter inflation expectations, which showed inflation expectations moving higher.
This is despite Governor Lesetja Kganyago pointing out the repo rate hike in May was intended to prevent inflation expectations from becoming entrenched at higher levels, rather than to respond to an actual rise in inflation.
“Since then, the inflation outlook has improved somewhat. The sharp decline in fuel prices is likely to prompt the Sarb to revise its near-term inflation forecasts lower,” she added.
“At the same time, the rand has remained resilient and has even strengthened against a basket of major currencies, helping to contain imported inflation. Although oil prices have recovered to around $85 per barrel, they remain well below the $95 per barrel levels seen in May.”
Decision coming on Thursday
Jacobs said she expects the Sarb to hold on Thursday, 23 July. “Domestic economic conditions also argue for caution. Real interest rates are now close to neutral, while household spending is beginning to moderate as disposable incomes come under pressure.
“Given these developments, we believe the MPC has scope to pause at this meeting, assess how the inflation outlook evolves, and determine whether further policy action is needed at a later stage.”
Johann Els, chief economist at PSG Financial Services, said it is unlikely that the Sarb will hike rates again next week.
“The renewed conflict in the Middle East over the past week, and the resulting increase in oil prices, has certainly made that call more difficult,” he said.
Good reasons to hold
Els said there are several good reasons to leave interest rates unchanged.
“The inflation expectations survey was conducted when oil prices were above $100 per barrel. Even after the recent increase, oil prices remain well below those levels, suggesting the survey probably overstates current inflation risks,” he added.
“Third quarter inflation expectations are likely to dip again, depending on how the renewed war unfolds. More importantly, the Reserve Bank acted proactively in May. At the time, I argued that an early rate hike would reduce the need for further tightening later, and I still think that argument holds.
“It is also important to note that many other Central Banks have not hiked rates. In addition, the rand exchange rate has remained remarkably stable, easing some of the potential inflationary pressures.”