X

This is not a paywall.

Register for free to continue reading.

The news sucks. But your reading experience doesn't have to. Help us improve that for you by registering for free.



Please create a password or click to receive a login link.


Please enter your password or get a login link if you’ve forgotten


Open Sesame! Thanks for registering.

First Thing, Daily Maverick's flagship newsletter

Join the 230 000 South Africans who read First Thing newsletter.

A South African Hero: You

There’s a 99.7% chance that this isn’t for you. Only 0.3% of our readers have responded to this call for action.

Those 0.3% of our readers are our hidden heroes, who are fuelling our work and impacting the lives of every South African in doing so. They’re the people who contribute to keep Daily Maverick free for all, including you.

We need so many more of our readers to join them. The equation is quite simple: the more members we have, the more reporting and investigations we can do, and the greater the impact on the country. We are inundated with tip-offs; we know where to look and what to do with the information when we have it – we just need the means to help us keep doing this work.

Be part of that 0.3%. Be a Maverick. Be a Maverick Insider.

Support Daily Maverick→
Payment options

SA Reserve Bank expected to raise interest rates by 50...

Business Maverick

MONETARY POLICY

SA Reserve Bank expected to raise interest rates by 50 basis points this week – poll

(Image: iStock)

Central banks around the world are caught in a bind, much of it perhaps of their own making. As surging inflation emerges in the aftermath of the Covid economic meltdown and Russia’s invasion of Ukraine, central banks in advanced economies – a big exception is Japan’s – are jacking up rates at a rapid pace after years of ultraloose monetary policies.

This is threatening to plunge Canada, the US and the European Union, among others, into recession.

So, spare a thought for the South African Reserve Bank as its Monetary Policy Committee meets from 19 to 21 July to decide on interest rates.

The consensus view is that the committee will increase rates by at least 50 basis points. A poll of 26 academics, economists and property specialists by Finder.com found that 73% expect a rise of 50 basis points, 12% forecast a 25-point hike and one panellist (4%) sees a 75-point increase on the cards.

The Reserve Bank has raised its key repo rate by 125 basis points to 4.75% since November, from a historic low of 3.5%, bringing the prime lending rate to 8.25%. In 2020, it acted decisively in the face of the Covid carnage unleashed on the economy, cutting the rate by 300 basis points.

The current tightening of monetary policy – known in central bank parlance as “normalisation” – has been triggered by domestic and global inflation pressures. 

Consumer price inflation in South Africa is now galloping at 6.5%, above the Reserve Bank’s 3% to 6% target range, driven mainly by food and fuel prices. This inflicts its greatest toll on poor and working-class households, which also carry the burden of an unemployment rate of more than 34%.

The Reserve Bank’s hand is also being forced by monetary “normalisation” elsewhere to contain inflationary pressures. 

As rates rise in the US, for example, rand assets lose their appeal compared with dollar assets – “carry trade” is the term of art – and the only way to counter that is to raise domestic rates.

That being said, US inflation is outpacing inflation in South Africa, where the economy is essentially now stuck in a pit latrine.

“With local inflation less aggressive than US inflation, the Reserve Bank has less need to keep up with the [US] Fed, and should rather aim to stimulate local economic growth,” said Ryan Booysen, managing director of DG Capital Forex Solutions.

“While the Reserve Bank may believe it needs to keep up with the Fed to maintain our carry trade and avoid too much liquidity being drained from the country, the local economy has been underperforming for some time, and our GDP per capita was in decline even before Covid.  

“For these reasons, the Reserve Bank might not be as hawkish as the US Fed in tightening policy.”

In recent days, the rand has crumbled to its lowest levels against the dollar since 2020, which makes imports such as oil more expensive. 

The rand’s one major prop for the past few years – roaring prices for commodities such as gold, iron ore and platinum group metals – is also crumbling as those prices cool off in the face of dollar strength in gold’s case and lower economic growth forecasts in the case of industrial metals.  

The worry here is that, although inflation needs to be contained, South Africa’s economy itself may be in the throes of a contraction. 

There is mounting evidence that the economy probably contracted in the second quarter of this year, and the slide has continued at the start of this quarter because of the unprecedented scale of rolling blackouts.

Manufacturing output in May declined 2.3% year on year after slumping 7.6% in April. Meanwhile, annual growth in retail sales slowed almost to a standstill in May, rising 0.1% after increasing 4.3% in April. On a monthly basis, retail sales were down 1.0%. Consumer confidence is at its second-lowest level in more than three decades and growth in house prices is slowing.

In an ideal world, the Reserve Bank should not be raising rates. 

Contrast South Africa’s unemployment rate of more than 34% with the US rate of 3.6%, for example. That also explains why US inflation is higher – the US economy actually has demand pressures.

But if the Reserve Bank doesn’t hit the pedal, and the rand tanks and inflation soars into double digits, then all bets are off. 

South African consumers must brace themselves for more pain. DM

Gallery

Comments - share your knowledge and experience

Please note you must be a Maverick Insider to comment. Sign up here or sign in if you are already an Insider.

Everybody has an opinion but not everyone has the knowledge and the experience to contribute meaningfully to a discussion. That’s what we want from our members. Help us learn with your expertise and insights on articles that we publish. We encourage different, respectful viewpoints to further our understanding of the world. View our comments policy here.

No Comments, yet

Please peer review 3 community comments before your comment can be posted