On Thursday, the repo rate increased by 75 basis points. The repo now stands at 5.5 percent, and the prime rate is now at 9 percent. Three members of the monetary policy committee supported the increase, while one sought a 100 basis point increase and another preferred a 50 basis point increase.
Since the repo rate was increased by 100 basis points in the midst of an emerging market crisis in September 2002, this is the largest increase. The most recent interest rate increase comes in the wake of a sobering inflation report that was announced on Wednesday: consumer inflation rose to 7.4 percent, the highest level in 13 years.
The most recent increase will result in an R950 monthly payment increase on a new home loan for R2 million at the prime rate. Since November of last year, the monthly mortgage payment has increased by about R3 000. The Reserve Bank increased interest rates by 50 basis points in May.
Numerous South African households are already under stress due to rising food and fuel costs, primarily as a result of the impact of the invasion of Ukraine. The significant rate increase just makes things worse.
According to SA Reserve Bank Governor Lesetja Kganyago, inflation continues to surprise on the upside. The bank has increased its prior projection of 5.9 percent to 6.5 percent for headline inflation this year. Kganyago issued a warning that rising inflation expectations will lead to larger salary demands from workers. As a result, inflation will increase even more.
He cautioned that the Russian battle in Ukraine is likely to continue for the remainder of this year and might have substantial further effects on global pricing. “Global producer price and food price inflation continued to surprise higher in recent months and may do so again,” he said.
The Reserve Bank hopes to reduce inflation by reducing demand in the economy by raising interest rates. Importantly, it must also keep up with sudden increases in interest rates in wealthy nations, especially the US. The rand and capital inflows into the country could become unstable if the US raises rates higher than South Africa.
Local assets are more appealing due to the high interest rates that foreign investors can earn in rands, but this advantage is being eroded by the swift increases in US interest rates. In response, the rand has already begun to deteriorate and has crossed the R17/$ mark for the first time since 2020.
In an effort to control inflation, the US Federal Reserve anticipates raising its benchmark rate by another 75 basis points the following week. Although KwaZulu-Natal experienced load shedding and flooding earlier this year, the Reserve Bank increased its projection for growth this year from 1.7 percent to 2.0 percent. But it drastically cut its growth projection for the years after that, from 1.9 percent for both years in May to just 1.3 percent in 2023 and 1.5 percent in 2024.