ByPrinesha Naidoo
(Bloomberg) — South Africa’s central bank delivered another jumbo interest-rate increase, prolonging its most aggressive monetary policy tightening cycle in at least two decades as it tries to tame inflation.
The monetary policy committee raised the benchmark rate to 7% from 6.25%, Governor Lesetja Kganyago said Thursday. The move matched the median expectation of economists in two separate Bloomberg surveys.
Of the five-member panel, three voted for the three-quarter point increase and two preferred a 50-basis-point hike. The bank’s forecasting model suggests it has front-loaded its fight against inflation, with the key rate seen 6.83% at the end of 2025. The Reserve Bank has repeatedly referred to the so-called quarterly projection model as a broad policy guide.
The vote split suggests the panel is reaching a “peak in hawkishness,” said Sanisha Packirisamy, an economist at Momentum Investments.
South Africa’s rand and yields on government debt were little changed after the announcement.
The key rate is now at a level last seen more than five years ago when the MPC was trying to guide consumer-price growth back below the 6% ceiling of its target band. It now matches the panel’s so-called steady state repurchase rate, which was published for the first time Thursday.
“We will still see increases in the repo rate going forward, but these will likely be at a slower pace,” said Angelika Goliger, chief economist at EY Africa. “I am expecting a couple more smaller rate rises, of 50bps and 25bps, at the first two meetings of 2023, and then hoping we will be at the top of the rate hike cycle — although not expecting rates to come down anytime in 2023.”
The Reserve Bank prefers to anchor expectations close to the 4.5% midpoint of its inflation target range. Thursday’s move serves to “increase confidence of attaining the target sustainably over time,” Kganyago said.
Headline and core inflation, which excludes the prices of food, non-alcoholic drinks, fuel and electricity, quickened in October, prompting the central bank to raise average forecasts through 2023. “If anybody wanted a measure that inflation is becoming broad-based, that would be it,” Kganyago said referring to the acceleration in core inflation.
The central bank now sees headline and core-price growth returning close to the target midpoint in 2024.
South Africa’s move comes after Federal Reserve officials flagged increased risks ofovertighteningand signaled they may cool the pace of US interest-rate increases to 50 basis points in December. While the Reserve Bank doesn’t match the Fed move-for-move, a slowdown in the pace of US hikes will ease pressure on South African policymakers to bolster the differential that makes local assets attractive to foreign investors.
Even though other central banks have also shifted to signal less aggressive hikes, the Reserve Bank didn’t commit to an imminent change in strategy. The policy stance “remains supportive of credit demand in the near term, while raising rates to levels consistent with the current view of inflation and risks to it,” Kganyago said.
‘Tame the monster’
The central bank lowered its projection for South African gross domestic growth to 1.8% this year and 1.1% in 2023. The prediction for next year assumes state-owned power utility Eskom Holdings SOC Ltd. will heighten power outages, shaving 0.6 percentage points off output.
Higher rates make it more expensive for consumers to borrow their way out of a cost-of-living crisis spurred by high food and fuel costs. Discount clothing, sports goods and homeware-retailer, Mr Price Group Ltd., on Thursday reported that earnings missed expectations in the first half, underlining a deterioration in buying power.
Inflation and rising interest rates make it a “very challenging trading environment,” Chief Executive Officer Mark Blair said.
Thursday’s move brings the cumulative rate increase to 350 basis points since November last year and will further weigh on household consumption spending that accounts for about two-thirds of gross domestic product.
While South Africans are now complaining about the rising cost of living, the central bank’s latest move will help to temper future price growth, Kganyago said. “Unless we tame the monster of inflation, we can’t have balanced and sustainable growth in this economy.”
(Updates with economist comment in fourth, seventh paragraphs)
–With assistance fromMonique Vanek,Rene Vollgraaff,S’thembile Cele,Colleen Goko,Janice KewandJohn Bowker.
SA Reserve Bank increased interest rates by a further 75bps to 7.00%, flagging continued upside risks to SA inflation
By Kevin Lings*
The South African Reserve Bank decided to increase the Repo rate (Repurchase Rate) by a further 75bps to 7.00% at its MPC meeting today. The decision was not unanimous, with2members of the MPC preferring an increase of 50bps. The decision was in-line with market expectations, although a couple of analysts (strangely) had argued for a hike of 100bps. The MPC statement highlighted the upside risks to SA inflation, including upward pressure on salaries. The fact that two MPC members voted for a hike of 50bps suggests that SA interest rates are getting close to a peak, but also that the Reserve Bank is now more aware of the downside risks to growth (see discussion below) as well as their favourable inflation forecast at end 2023. Listening to the press conference after the rate decision, it seems fair to argue that the Repo rate is not yet at a peak, especially given the most recent increase in core inflation.
The Reserve Bank last adjusted interest rates on 22 September 2022, when they increased the Repo rate by 75bps. Since November 2021, the Repo rate has now increased by a total of 350bps. South Africa’s prime interest rate should now increase to 10.50%.
Critically, according to the MPC “higher than expected inflation has pushed major central banks to accelerate the normalisation of policy rates. This has tightened global financial conditions and raised the risk profiles of economies needing foreign capital” – which would include South Africa. Consequently, “capital flow and market volatility is elevated for emerging market assets and currencies”.
The Reserve Bank, once again, highlighted the upside risks to SA inflation, which is still focused on a wide range of factors including oil, food administered prices, the Rand exchange rate, and salaries. In particular, the Bank’s food price inflation forecast is revised higher to 6.2% in 2023, up from 5.5% previously. And their estimate of headline inflation for this year and next is slightly higher at 6.7% and 5.4%, respectively. For 2024 and 2025 headline inflation is expected to average 4.5%.
In contrast,the risks to SA economic growth are now to the downside. This means that the MPC has once-again changed their risk assessment regarding SA’s economic growth. Back in July 2022, the MPC highlighted that the “risks to SA growth are weighted to the downside”. However, in their 22 September MPC statement the risk to SA economic growth were viewed as being “neutral”, despite ongoing severe electricity outages, higher interest rates and downward revision to global growth. The Bank’s SA GDP growth estimate for 2022 was revised down slightly to 1.8% from 1.9% previously, while their 2023 estimate was reduced significantly to 1.1%, having been revised higher in September from 1.3% to 1.4%. For 2024 SA GDP growth is forecast at a still modest 1.4%, down from 1.7% previously. For 2025 SA GDP growth is estimated at only 1.5% despite government’s promises of increased fixed investment spending.
Overall, the latest interest rate decision needs to viewed within a global interest rate context. Itcan be argued that SA should not increase interest rates aggressively considering the current weak economic environment, high food and fuel prices (which are difficult for most households to avoid), high unemployment and service delivery constraints . However, the Bank has repeatedly highlighted their desire to ensure that SA inflation is anchored around the mid-point of the inflation target and that allowing SA inflation to remain above the inflation target unchallenged is unacceptable and would undermine the recent gains in getting inflation expectations lower. Without rates hikes, SA has a high risk of quickly developing a self-reinforcing upward spiral in inflation driven by wage demands and a weaker exchange rate.
At this stage it still seems reasonable to assume that theReserve Bank is likely to continue to hike ratesduring the early part of 2023 – possibly by a further 50bps at the first MPC meeting in 2023 followed by a final hike of 25bps at the second MPC meeting. However, is also seems fair to assume that once inflationary pressures have abated more convincingly, the bank will want to pause and more clearly assess the need for any further rate hikes – especially if SA’s inflation rate is heading convincingly towards 4.5% at the end of 2023 and the major central banks are also looking to end their own rate hiking cycle.
Read also:
- October inflation jump to 7.6% exceeds market expectations
- ‘South Africans must take their inflation medicine’
- Inflation, fear not. Central bankers may be slow, but the job may get done on time.
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FAQs
What does a 75 basis point hike mean? ›
“The Federal Reserve's 75 (basis points) increase now means that, in the space of just 4 months, they have hiked rates by as much as they did over the entire 2015-2018 hiking cycle,” said Seema Shah, chief global strategist at Principal Global Investors.
What happens when the Reserve Bank increases interest rates? ›For those looking to invest in term deposits or bonds, an increase in interest rates will generally mean higher rates of return. Term deposits usually offer higher returns in a rising interest rate environment and lower returns in a falling interest rate environment.
Did SARB increase interest rates? ›The SARB has now raised rates at 10 meetings in a row, adding a total of 475 bps to the repo rate since it began tightening policy in November 2021. The bank said in a statement that the policy rate was now in "restrictive" territory. Previously the bank had said its policy was accommodative or supporting the economy.
What is the decision on the SARB rates? ›The Sarb's five-member monetary policy committee unanimously voted to raise the rate by 50 basis points to 8.25%. This was its tenth consecutive rate hike, making a total of 450bp of increases since November 2021. Headline inflation is decelerating, but is still above the Sarb's target range of 3% to 6%.
What will happen if Fed raises 75 basis points? ›So if your credit card APR is 18.15% and the Fed increased its federal funds rate by 75 basis points, your issuer would likely raise your APR to 18.90%. The higher the interest rate that's applied to your credit card balance, the more expensive it is to carry that debt.
Will Feds raise rates 75 basis points? ›At the conclusion of its two-day policy meeting on Wednesday, the Federal Open Markets Committee said it voted unanimously to raise the federal funds rate (the rate at which commercial banks borrow and lend reserves) by 75 basis points for the fourth meeting in a row to a target range of 3.75% to 4%—the highest level ...
Who gets the extra money when interest rates rise? ›“The winners tend to be people who have high savings, and obviously benefit from high interest rates,” Oliver says. “The losers tend to be those with net debt. Those with more net debt tend to suffer because they pay more on interest rates servicing that debt.
How high will interest rates go in 2023? ›With the next Federal Reserve meeting coming up on May 3, 2023, it's uncertain if the Fed will keep interest rates in a holding pattern through the spring. Both the Fed and experts are predicting another 0.25% rate hike for May.
Who makes money when interest rates go up? ›Financials First
The financial sector has historically been among the most sensitive to changes in interest rates. With profit margins that actually expand as rates climb, entities like banks, insurance companies, brokerage firms, and money managers generally benefit from higher interest rates.
1) Interest-rate forecast.
We project a year-end 2023 federal-funds rate of 4.75%, falling below 2.00% by mid-2025. That will help drive the 10-year Treasury yield down to 2.25% in 2025 from an average of 3.5% in 2023. We expect the 30-year mortgage rate to fall from an average 6.25% in 2025 to 4% in 2025.
What is the interest rate in SA? ›
The 50 BPS hike to the repo rate means that the repo rate will now increase to 8.25% and the prime lending rate to 11.75%. in the country. This increase is the 10th consecutive increase since the start of 2022, with South Africans seeing the repo rate rise from 3.75% at the start of January 2022.
Will interest rates go down in 2024? ›These organizations predict that mortgage rates will decline through the first quarter of 2024. Fannie Mae, Mortgage Bankers Association and National Association of Realtors expect mortgage rates to drop through the first quarter of 2024, by half a percentage point to about nine-tenths of a percentage point.
What happens if the SARB increases the minimum reserve ratio? ›Key Takeaways. The reserve ratio is the central bank's mandate for banks to keep a certain reserve requirements, which are excess cash deposits that must be kept on hand and not loaned out. Raising the ratio is contractionary since less loans can be made, but this also solidifies banks' balance sheets.
What does the Federal Reserve do to manipulate interest rates? ›Because the interest on reserve balances rate is an administered rate, the Fed can steer the federal funds rate by adjusting the interest on reserve balances rate. In fact, interest on reserve balances is the primary tool the Fed uses to adjust the federal funds rate.
What is the Reserve bank inflation expectations? ›However, CPI inflation, at 7.2 percent in the year to the December 2022 quarter, remains well above the 1 to 3 percent target range set out in the Remit.
What are the odds of 75 bps rate hike? ›Indeed, according to CME Group's FedWatch tool, as of Sept. 16, market participants' pricing of fed fund futures indicates there is a 84% probability that the Fed will increase rates by 75 basis points at the next meeting, and a 16% probability it will increase rates by 100 basis points.
What is the Fed basis point increase for 2023? ›BENGALURU, April 20 (Reuters) - The U.S. Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023, according to economists in a Reuters poll, which also showed a short and shallow recession this year was likely.
Will Fed raise rates by 50 basis points? ›No Chance of a 50 Basis-Point Rate Hike, According to Market Pricing.
What is the fourth 75 bps hike? ›The Federal Open Market Committee, the panel of Fed officials responsible for monetary policy, boosted the central bank's baseline interest rate range to a span of 3.75 to 4 percent. It is the fourth consecutive 75 basis point hike issued by the Fed and sixth interest rate increase since March.
What does 75 basis points look like? ›75 basis points / 100 = 0.75%
What will the interest rate be in 2024? ›
An interest rate forecast by Trading Economics, as of 12 May, predicted that the Fed Funds Rate could hit 5.25% by the end of this quarter - a forecast that has been materialised. The rate is then predicted to fall back to 3.75% in 2024 and 3.25% in 2025, according to our econometric models.
What to buy with rising interest rates? ›“When interest rates are going to be higher for longer, where you want to invest is largely going to be value oriented assets such as banks, financials, credit card companies, or insurance companies,” said Cox.
Who benefit from inflation? ›Inflation benefits those with fixed-rate, low-interest mortgages and some stock investors. Individuals and families on a fixed income, holding variable interest rate debt are hurt the most by inflation.
What to invest in when interest rates go up? ›- Banks and other financial institutions. As rates rise, banks can charge higher rates for their loans, while moving up the price they pay for deposits at a slower pace. ...
- Value stocks. ...
- Dividend stocks. ...
- The S&P 500 index. ...
- Short-term government bonds.
| Loan Type | 10-Year Treasury Note High Yield | Fixed Interest Rate |
|---|---|---|
| Direct Subsidized Loans and Direct Unsubsidized Loans for Undergraduate Students | 3.448% | 5.50% |
| Direct Unsubsidized Loans for Graduate and Professional Students | 3.448% | 7.05% |
'I believe by the end of 2023 we will see rates start to fall with a target of between 2.5 to 3 per cent in 2024. 'I believe if the base rate can get back to circa 2.5 per cent, then we will see rates hovering around that mark with a return to products that have not been seen in the mortgage industry for some time.'
How high will interest rates go in 2025? ›The predictions made by the various analysts and banks provide insight into what the financial markets anticipate for interest rates over the next few years. Based on recent data, Trading Economics predicts a rise to 5% in 2023 before falling back down to 4.25% in 2024 and 3.25% in 2025.
Who will higher interest rates hurt? ›Borrowers who do take on these types of loans risk unaffordable payments if rates continue to rise. The cost of mortgages will reduce prospective borrowers' ability to buy homes, one of the central ways people build wealth, says Edwards. And the fallout will hit prospective first-time home buyers the hardest.
Who is affected by high interest rates? ›One sector that tends to benefit the most is the financial industry. Banks, brokerages, mortgage companies, and insurance companies' earnings often increase—as interest rates move higher—because they can charge more for lending.
Will there be more interest rate hikes in 2023? ›The US Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023, according to a Reuters poll of economists. The poll also showed that a short and shallow US recession is likely this year.
Which SA bank has the best interest rate? ›
- Standard Bank. For the 48-month fixed deposit account, Standard Bank has the best interest rate. ...
- Capitec Bank. Capitec Bank offers 9.10% nominal interest rate for its 48 months fixed deposit account. ...
- First National Bank.
As of January 2022, the country with the highest deposit interest rate worldwide was Venezuela, where the interest rate was as high as 36 percent. Second in the list came another South American country, Argentina, where the interest rate reached 33.9 percent.
What is the prime rate forecast for 2024? ›However, with the economy expected to cool and possibly dip into a recession, many recent forecasts expect rates to drop to 6% or below in 2024, including a Fannie Mae projection of 5.2%.
Will home prices drop in 2023 recession? ›Fannie Mae expects home prices to decline in 2023 and 2024. However, this correction is “considered mild” because national home prices are still projected to be up 29% by the end of 2024 compared to March 2020 levels, Norada noted.
What if the reserve requirement is 10 percent? ›The required reserve ratio gives the percent of deposits that banks must hold as reserves. It is the ratio of required reserves to deposits. If the required reserve ratio is 10 percent this means that banks must hold 10 percent of their deposits as required reserves.
What if the reserve ratio is 5 percent? ›With a reserve ratio of 5%, a money multiplier of 1/0.05 or 20 is expected. The money multiplier of 20 is expected because if you have deposits of $1 million and a reserve ratio of 5%, you can then lend out $20 million.
Is South Africa in a recession in 2023? ›WASHINGTON, April 14 (Reuters) - South Africa will not fall into recession this year despite a gloomy International Monetary Fund (IMF) forecast and a contraction in the last three months of 2022, its finance minister told Reuters in an interview on Friday.
What are the 3 things the Federal Reserve can do to increase interest rates? ›The Fed has traditionally used three tools to conduct monetary policy: reserve requirements, the discount rate, and open market operations.
Why does the Fed keep raising interest rates? ›The Federal Reserve seeks to control inflation by influencing interest rates. When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down.
How does raising rates help inflation? ›
As mentioned before, raising interest rates helps inflation by reducing consumer borrowing and spending, thereby cooling off demand for goods and services. This then helps lower prices and reduce inflation.
Do banks profit when inflation rises? ›Demand deposits, net of reserves, however, will shrink in value as prices rise. Consequently, the liabilities of the bank fall in real terms and banks gain.
Do banks make more money when inflation is high? ›Inflation Can Also Help Lenders
On top of this, the higher prices of those items earn the lender more interest. For example, if the price of a television increases from $1,500 to $1,600 due to inflation, the lender makes more money because 10% interest on $1,600 is more than 10% interest on $1,500.
Basic Info. 5-Year, 5-Year Forward Inflation Expectation Rate is at 2.27%, compared to 2.26% the previous market day and 2.32% last year. This is higher than the long term average of 2.25%.
When was the last time the Fed raised rates 75 bps? ›The last time the Federal Reserve raised rates by 75 basis points was in November 1994 when the central bank was able to orchestrate a soft landing by tightening monetary policy ahead of rising inflation.
What are basis point rate hikes? ›Interest rates that have risen by 1% are said to have increased by 100 basis points. If the Federal Reserve Board raises the target interest rate by 25 basis points, it means that rates have risen by 0.25% percentage points.
What is the highest federal interest rates in history? ›The fed funds rate has never been as high as it was in the 1980s. Most of the reason why is because the Fed wanted to combat inflation, which soared in 1980 to its highest level on record: 14.6 percent.
What is the Fed basis-point increase for 2023? ›BENGALURU, April 20 (Reuters) - The U.S. Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023, according to economists in a Reuters poll, which also showed a short and shallow recession this year was likely.
How high will rates go in 2023? ›With the next Federal Reserve meeting coming up on May 3, 2023, it's uncertain if the Fed will keep interest rates in a holding pattern through the spring. Both the Fed and experts are predicting another 0.25% rate hike for May.
What is the Fed rate expectations for 2023? ›The Fed could hint at a pause
When Fed policymakers released their economic estimates in March, they expected to raise interest rates to a range of 5 to 5.25 percent in 2023.
What are the odds of 50 bps rate hike? ›
There is a 0% chance of a 50 basis-point hike based on the pricing of federal-funds futures, according to the CME FedWatch Tool.