The interest rate hike of 25 basis points this week, taking the repo rate to 7.25% and the prime interest rate to 10.75%, was the eighth consecutive increase in the current upward rates cycle. However, it was somewhat lower than widely held expectations of a 50 or even 75 basis points increase. 

The SA Reserve Bank began hiking rates fairly early in the current cycle, and having front-loaded its tightening, is now in a position to taper as global and local inflationary pressures begin to fade. Three members of the Monetary Policy Committee preferred the 25 basis points increase, while two members voted for a stronger increase of 50 basis points. 

Frank Blackmore, the lead economist at KPMG, says the increase makes sense. “We are already at high levels of interest rates. They could have been punitive with an increase of 50 basis points, but by choosing smaller increments, it buys the ability to do something to address inflation without harming the economy.”  

Reserve Bank Governor Lesetja Kganyago says although the South African economy grew by a relatively strong 1.6% in the third quarter of 2022, the expansion was not broad-based. 

“We forecast no growth in the fourth quarter. For the whole of last year, GDP growth of 2.5% is expected (up from 1.8%). For 2023, and as a result of extensive load shedding and other logistical constraints, the bank now forecasts GDP growth of only 0.3%,” he says. 

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South Africans have also been buckling under the effects of high fuel prices with fuel price inflation averaging 34.5% last year, which is expected to fall to a negative 2.7% this year. Local electricity price inflation has been revised higher at 12.9% in 2023, 14.5% in 2024, and 10.9% in 2025. The National Energy Regulator of SA (Nersa) has approved electricity tariff increases of 18.65% effective from this April and another 12.74% to kick in from April next year.

Looking ahead, Kganyago says the SA Reserve Bank’s forecast of headline inflation for 2023 is unchanged at 5.4% and is slightly higher at 4.8% for 2024. 

“In 2025, we still expect headline inflation of 4.5%. This central bank means business when it comes to price stability. Interest rates are but one tool we use to deal with inflation, albeit the most important and effective tool,” he says. 

Palesa Mabasa, FNB’s business development head for SME funding, says the announcement is likely to mean elevated interest rates for a while longer as the risks to the inflation outlook are still assessed to the upside.

Mabasa adds that the rate hike comes at a time when agriculture faces serious headwinds that include persistent rolling blackouts, infrastructure and logistics challenges, and higher input costs that may wipe out profit margins and impede growth.

“The higher interest rates and elevated inflation erode farm profit margins and liquidity, which may constrain farmers’ ability to service debt and further limit production expansion. 

“Load shedding has caused havoc in the agriculture sector and any further deterioration in electricity supply in the medium to longer term may necessitate production cutbacks and consequently a domestic supply crunch for certain commodities such as poultry,” she warns. 

Looking at the impact for the property market and homeowners, Samuel Seeff, chairman of the Seeff property group, was nonplussed. 

“People always need a roof over their heads, lifestyle needs change, and for a variety of other reasons, we will continue seeing demand in the market. We are also likely to continue seeing strong migration to the coastal areas, especially in view of the growing service delivery challenges and Eskom energy crisis,” he says. DM/BM