Arguably the most anticipated and highly polarising decision from the South African Reserve Bank (SARB) in a while, the repo rate (November 2021). The rate has been sitting at 3,5% since July 2020, an all-time low.
The Monetary Policy Committee (MPC) which sits at the SARB, is primarily tasked with protecting the value of the rand while managing inflation. The same way we evaluate the National Treasury on its ability to lead real GDP growth, we look to the SARB to monitor inflation within the 3-6% range and protect the rand from long-term depreciation. Going into the meeting, South Africa was faced with a paradox of economic realities which left analysts poles apart as to what the ideal move would be. To hold or to hike.
Figure 1: Historical repo rate (Jan 2010 – Nov 2021)
- South Africa’s economic recovery has been on a strong economic growth trajectory (expected to finish at 5,2%) since the start of the year. This is partly because of the economic recovery spill-off from our international trade counterparts and a low-interest environment.
- Unemployment is currently sitting at 34%, thus consumer demand is already under pressure. Low-interest rates have been supporting the weak consumer.
- The rand exchange rate is weak and has, for the longest time been trading lower than its fundamental value as measured by purchasing power parity. Holding the interest at low levels for a prolonged period could exacerbate an already subdued rand. A hike on the other hand may see SA assets becoming attractive (cheaper) for foreign investors, thereby leading to the rand’s appreciation.
- Inflation for the months September and October was sitting flat at 5%. Closer to the upper band of 6%. However, there is some upward pressure from fuel inflation and oil prices. These are indirectly finding their way into the CPI inflationary basket.
The reasons for holding seem to point in the direction of the pursuit of economic growth. This is in the domain of the National Treasury, not SARB which is tasked with targeting inflation and protecting the value of the rand. The arguments put forward for hiking speak directly to the curbing inflation and strengthening the rand.
“Three members of the Committee preferred an increase (hike),
and two members preferred an unchanged stance (hold)”
The decision (hotly contested as it was) is a brave and welcome one. The SARB acted in time to curb inflation potential that could have spiraled out of control. This is also a testament to the fact the institution’s decisions were guided by its mandate not that of the National Treasury.
We should keep an eye on inflation for November and December to assess the impact of the rate hike decision. Looking ahead, the interest hike is expected to contain inflation while supporting growth. It is worth noting, however, that 3,25% is still relatively low, historically. As such we may see several hikes in 2022.