Bank springs hawkish surprise

• Repo rate raised by 50 basis points

The Reserve Bank has surprised the market with a steeper-thanexpected 50 basis point rate, citing concerns about the effect of load-shedding on prices and of global financial market turmoil on the rand and inflation.

The hike, and the monetary policy committee’s more hawkish rhetoric, prompted the rand to a six-week high of R17.74 against the dollar, the strongest level in six weeks.

The Bank’s decision comes on an inflation forecast that, at 6% for this year, is significantly higher than in January. Inflation expectations have risen to 6.3%

well above the 4.5% midpoint of the inflation range that the Bank targets.

What has also changed is that global financial conditions have tightened after the bank failures in the US and Europe.

The Bank, which had already slashed its economic growth forecasts earlier this year as SA’s electricity crisis intensified, now “guesstimates” load-shedding could have added as much as 0.5 percentage points to the overall inflation rate, governor Lesetja Kganyago said on Thursday, adding, though, that the Bank is modelling load-shedding effects on inflation and its guesstimate was an informed one.

The Bank now sees inflation averaging 6% this year, significantly up on its 5.4% January forecast, in part as a weaker exchange rate is expected to drive up local food price inflation and the prices of core goods.

And though it sees inflation declining to an average of 4.5% by 2025, this could prove too optimistic in the light of the risks from global oil prices as well as local electricity and other regulated prices.

“Load-shedding may additionally have broader price effects on the cost of doing business and the cost of living, in particular as diesel consumption increases,” the committee said.

The Bank cut its growth forecast for 2023 slightly further, to just 0.2%, from 0.3% in January, because of extensive loadshedding and logistical constraints, which it said had severely impaired the economy’s supply performance.

It noted again that these constraints would deduct 2 percentage points from this year’s growth rate. The Bank has upped its forecasts for the next two years slightly, though it sees prospects for growth as “even more uncertain than normal”.

It cautioned that SA was now more reliant on capital inflows, with the deficit on the balance of payments current account widening, and had to monitor global financing conditions closely in the wake of the bank failures in the US and Europe and the tighter and more uncertain global financing conditions resulting from those.

“We are a country with external financing needs so we have

got to watch whether we would still be able to attract foreign financing … If we are unable to, what normally happens is the price adjusts, which means in our case either bond yields go up or the currency weakens,” Kganyago said.

The rand has generally weakened over the past year and, since January, has depreciated from about R17.30 to more than R18. The Bank expects currency markets to remain volatile.

Economists, who were widely expecting a rate hike of just 25 basis points, are now pondering whether to expect more rate hikes from a Bank that, in the words of RMB Morgan Stanley economist Andrea Masia, has shifted back into hawkish territory, with the new Morgan Stanley Semantic index scoring its statement as more hawkish than January’s.

Masia said the Bank’s decision was a frontloading exercise but further rate hikes could not be ruled out. Though that is not his base case, exchange rate and core inflation developments would be triggers that could force the Bank’s hand.

Standard Chartered economist Razia Khan said having frontloaded its tightening, even against its own model, and with the Rand rallying strongly in response, there seems at this point to be little need to deliver even more rate tightening.

“We had long expected 7.75% to be the terminal repo rate in this cycle,” she said.