Lesetja Kganyago announces 50bps rate hike, confounding predictions

He was briefing the nation on Thursday evening after the South African Reserve Bank monetary policy committee’s (MPC) meeting this week. Kganyago’s announcement likely comes as a shock, as economists were widely expecting a 25 basis points hike ahead of the meeting.

“The monetary policy committee decided to increase the repurchase rate by 50 basis points to 7.75% per year, with effect from 31 March 2023. Three members of the committee preferred the announced increase while two members preferred a 25 basis points increase.

“The revised repurchase rate is now less accommodative and is more consistent with the current view of risks to inflation. The aim of the policy is to anchor inflation expectations more firmly around the mid-point of the target band and to increase confidence of attaining the inflation target sustainably over time,” said Kganyago.

Kganyago pointed to sticky inflation and sluggish growth which marked the global economy and little sign of any material easing of difficult economic global conditions.

“With inflation and policy rates remaining higher for longer and new weaknesses emerging in financial institutions, we expect global financial markets to remain volatile. Taking these and other factors into account, the Sarb forecast for global growth in 2023 is revised higher to 2%,” Kganyago said.

Kganyago said the MPC expected household spending to grow modestly even as load-shedding remains a headwind to the local economy. Russia’s war in Ukraine and China’s recovery are expected to keep the oil market tight, he added.

“The South African economy contracted by 1.3% in the fourth quarter of 2022, considerably worse than expected at the time of the January meeting. The contraction was broad-based, consistent with the extensive load-shedding experienced in the final three months of the year,” he said.

He said tighter global financial conditions raise the risk profiles of economies needing foreign capital leading, generally, to weaker currencies. Kganyago warned that South Africa’s risk premium was sharply higher and will likely remain elevated over the forecast period.

“For 2023, the bank’s forecast for GDP growth is lowered slightly to 0.2% from the 0.3% expected in January. As a result of extensive load-shedding and logistical constraints, the supply performance of the economy remains severely impaired,” he said.

Kganyago noted the public sector wage talks as one factor that could add to inflation but said it was not the most important factor, adding that this depends on the government’s ability to absorb the increase contained in the final settlement.