South Africa Raises Interest Rates 50bps, Rand Falls to All Time Low

The South African Reserve Bank (SARB) increased its benchmark repo interest rate by another 50 bps to 7.25% at its May 2023 meeting. Markets had expected a smaller 25 bps increase. Policymakers cited concerns regarding the significant depreciation of the rand and the mounting pressures of inflation as key drivers behind the rate adjustment. The SARB also revised its inflation forecasts, with inflation for 2023 now projected to average 6.2%, up from the previous estimate of 6.0%.

The move triggered selling in the rand which fell to a record low as Governor Lesetja Kganyago warned that further currency weakness is likely. It was the 10th consecutive rate hike since policy normalization started in November 2021, bringing borrowing costs to the highest since May 2009.

SARB Board 2022

All the MPC’s five members voted for the half-point increase. There have been a cumulative 475 basis points of interest-rate hikes since November 2021

South African Interest Rates
South Africa Interest Rate

Forward-rate agreements (FRA) are now pricing in another 50 basis points of hikes by year-end.

“The medication might be bitter but if the patient does not take the medicine they will end up in surgery and intensive care,” Kganyago said. “Our task as the South African Reserve Bank is in accordance with our mandate that says we must preserve price stability in the interest of balanced and sustainable growth.”

South Africa Inflation

SARB also revised its inflation forecasts higher

  • Inflation for 2023 is now projected to average 6.2%, up from the previous estimate of 6.0%.
  • Inflation for 2024 is expected to average 5.1%, up from the earlier projection of 4.9%.
  • Estimates for core inflation, which excludes the cost of food, non-alcoholic drinks, fuel and electricity, were raised to 5.3% and 5% for this year and next.
  • The bank’s inflation target is 3% to 6%.

“At the current repurchase rate level, policy is restrictive, consistent with elevated inflation and risks,” Kganyago said. “The policy stance aims 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.”

SARB Governor Lesetja Kganyago said during a press briefing.

South Africa Growth

SARB also revised its growth forecasts higher

  • SARB adjusted its 2023 GDP forecast, with the economic growth now expected at 0.3%, a slight increase from the previous estimate of 0.2%.

The rate rise will further weigh on household consumption spending those accounts for about two-thirds of South African GDP. Higher interest rates make it more expensive for consumers to borrow as they confront a cost-of-living crisis stoked by high food prices.

South Africa’s Markets Reaction

“Given upside inflation risks, larger domestic and external financing needs, and loadshedding, further currency weakness appears likely,” Kganyago said.

  • The rand traded 2.2% weaker at 19.6657 per dollar by 4:15 p.m. in Johannesburg, after hitting a record low of 19.7640.
  • Yields on government debt maturing in 2026 fell 10 basis points to 9.65%.
  • The yield curve steepened aggressively post the rate hike with fiscal fears of poor growth prospects.

The rand weakened after Kganyago said that tighter global financial conditions raise the risk profiles of economies needing foreign capital. Daily electricity rationing and logistics-network constraints, the recent gray listing of the country by the Paris-based Financial Action Task Force and allegations by the US that Pretoria supplied weapons to Russia have all fed into the rand’s steep decline this year. via BBG

Source SARB

From The Traders Community Research Desk