Drastic Interest Rate Hike chokes Businesses and Households

Interest Rate Hike

SARB Governor Lesetja Kganyago should quote the lyrics of Britney Spears “Oops, I did it again!” when his Monetary Policy Committee (“MPC”) surprised the public as well as the experts by raising the Repo Rate by 50 basis points. This translates to a new Repo Rate of 7.75% and a prime lending rate increasing from 10.75% to 11.25%, the highest in almost 15 years.

The MPC voted 3:2 in favour of a 50 basis point hike, like usual oblivious to what is going on on the floors of South African businesses and households. The imported inflation remains as strong as before, which means that previous interest hikes did not have any effect, a lesson not learned and ignored within the echelons of the monetary power tower SARB.

The year-to-year inflation rate rose in February to 7.0% compared to January with 6.9%, a whopping 0.1% rise while the new inflation rate is only 1.0% outside the target band for inflation of between 3% and 6%. Therefore, not really a reason for this drastic rate correction.

To the contrary: The South African Economy declined in the fourth quarter of 2022 by 1.3%, about four times as much as experts expected, while the outlook for the first quarter of 2023 is not much better due to ongoing loadshedding combined with logistical issues at ports and on rails, exposing the country to the risk of entering a recession. The correct countermeasure here would be to incentivise investments and therefore lower the interest rate if not at least leave it unchanged.

The economy is treading water at 2018 levels, we are facing over 200 days of loadshedding in 2023 and a technical recession, while the inflation is almost stable at 1% outside the target corridor and households as well as businesses struggle to make months’ end as everybody is still recovering from the financial hardship caused unnecessarily by the incompetent leadership during the pandemic.

This would have to be the moment to leave the rates unchanged, but at least the Rand gained a few cents towards the major currencies as the unforeseen rate hike was double of what the Fed in the USA had hiked their interest rates earlier in the week. Bad for tourists, good for Exporters 😉

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