There was a good case for hiking the repo rate by only 25bps (instead of 50bps), said Dr Andrew Golding, CEO of Pam Golding Properties.
Dr Golding was commenting on the Reserve Bank’s decision to raise the bank lending rate by 50 basis points to 4.75% in May.
He said SA’s economy is wallowing in a troubled state, with high unemployment, rising poverty levels and household finances under pressure from rising prices. There are fears of yet another significant hike in the fuel price in June as government’s temporary R1.50 per litre general fuel levy subsidy ends.
These forces might prompt one to argue that any increase at all in the repo rate would over-burden consumers and further dampen the economy, according to Golding. Loadshedding has become a regular evening fixture and the recent shocking flooding in KwaZulu-Natal is only hurting the economy more, says Golding.
“Locally, the primary concern for the Monetary Policy Committee is the impact that the resurgent inflation rate is having on inflation expectations. Prior to the war in Ukraine, the Reserve Bank had managed to anchor inflation expectations around the mid-point of the inflation target – which provided scope for the Reserve Bank to aggressively cut interest rates in the early stages of lockdown, providing a buffer for economic activity during the pandemic,” he says,
“Now, however, there are signs that elevated inflation is impacting inflation expectations, resulting in recent above inflation wage demands in both the public and private sector,” said Dr Golding.
May’s rate hike was the fourth consecutive at an MPC meeting, following three previous increases of 25bps each. It has been stated that South Africa needs to normalise interest rates, from pandemic-induced lows, in line with the US Federal Reserve, to avoid further Rand weakness at a time of soaring global food and energy prices.
“Nevertheless, we had hoped that any increase would be only 25bps, not the 50bps widely forecast. In addition to the weak economy, the case for hiking by only 25bps was further supported by the fact that core inflation remains below the mid-point of the Bank’s inflation target at just 3.9% in April,” said Dr Golding.
Alistair Anderson