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Kganyago signals more rate hikes

• Policy remains accommodative, says Bank governor after half-point rise in interest rates

Thuletho Zwane and Lukanyo Mnyanda

Reserve Bank governor Lesetja Kganyago prepared businesses and consumers for higher borrowing costs as he argued that monetary policy remains “accommodative” even after an increase in the repo rate that was the largest in six years.

The 50 basis points increase to 4.75% came despite the Bank reducing its GDP growth forecast for 2022 to just 1.7%, from 2% at the March meeting, citing recent flooding in KwaZuluNatal and Eskom power cuts. One of the five monetary policy committee members voted for a 25 basis points increase.

The Bank upgraded its inflation forecast slightly to 5.9% for the year — just below the upper end of its target range — and said it will then slow to an average 5% in 2023 and 4.7% in 2024.

While the call was anticipated by 16 of 24 economists surveyed by Reuters, the rand still jumped, indicating that some investors were looking for a smaller move.

Bloomberg reported earlier that money markets priced in about 74% odds of a half percentage point move. Higher rates support the currency by attracting capital searching for higher-yielding assets.

The fourth consecutive rate increase came in the context in which a spike in global inflation has prompted central banks from the US to India to hike borrowing costs.

Earlier in May, the US Federal Reserve lifted its main rate by half a percentage point, the biggest increase in more than 20 years, as it grapples with inflation at 40-year highs. It has endured criticism that it kept policy too loose for too long.

In the media conference after the decision, Kganyago pushed back against suggestions that conditions in SA are different and that the Bank opens itself to accusations that it is not sensitive enough to the needs of an economy that is plagued by slow growth and record unemployment above 35%.

“The adjustment in the policy stance is consistent with the outlook that we have presented,” he said. “Even in so doing, we believe that policy remains accommodative.”

The Bank can support the economy and workers by maintaining the value of their money, and it will be vigilant in this, he said.

The Bank’s quarterly projection model, which the governor stresses is a policy guide rather than a forecast, suggests that the rate of increases will accelerate

modestly. It sees the repo rate reaching 5.3% in the fourth quarter of 2022, 6.21% in 2023 and 6.74% in 2024. That compares with 6.5% at the start of 2020, before the Bank took the rate to a record low 3.5% in July 2020 in the wake of the Covid outbreak.

“You do not allow inflation to run unsustainably high because the cost of bringing inflation from those high levels to the levels that are consistent with price stability have got significant costs,” Kganyago said. “High inflation does not lead to higher growth.” Instead, “it’s eating into the incomes of working people”.

The rand extended its gains after the decision was announced and had firmed the most in two weeks by 7.42pm, 1.46% stronger at R15.8277/$, making it the second-best performer after the Russian rouble among emerging markets tracked by Bloomberg. Despite recent losses, it has been among the more resilient in 2022, supported by higher metal prices. Prior to the speech, the rand had been 0.5% firmer at R15.98/$.

SA bonds also gained, with the yield on the R2030 security, which moves inversely to the price, falling 11 basis points to 9.86%.

“This was a credibility hike to maintain confidence that the Bank will act to protect the rand and its knock-on impact to import inflation,” said Thalia Petousis, portfolio manager at Allan Gray. “Looking at the [Bank’s] quarterly projection model for the repo rate, one cannot help but notice that it is still far more sanguine than the markets”, which are pricing in a repo rate of 6% by the end of 2022.

Kganyago said the monetary policy committee’s ultimate decision is to preserve credibility and to avoid a de-anchoring of inflation expectations.

FNB CEO Jacques Celliers said the gradual normalisation of interest rates supports the country’s economic recovery, “particularly in light of global growth concerns and local events such as the KwaZulu-Natal floods.

“The adjustment should also be viewed as a response to rising inflationary pressure as well as record high fuel and food prices,” Celliers said.

THE RAND EXTENDED ITS GAINS AFTER THE DECISION WAS ANNOUNCED AND HAD FIRMED THE MOST IN TWO WEEKS TO R15.8277/$

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2022-05-20T07:00:00.0000000Z

2022-05-20T07:00:00.0000000Z

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