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Thursday, May 30, 2024

Rate hike aligns with wider global trends, says FNB

In reaction to the South African Reserve Bank’s (SARB) decision to increase its repo rate by 0.75%, FNB will lift its prime lending rate by 0.75% with effect from Friday 22 July 2022.

FNB CEO Jacques Celliers says, “We are seeing rates rise rapidly around the world as central banks take steps to rein-in inflation and restore price stability. To place the rate hike in perspective, the new prime rate remains below the levels of January 2020, prior to the pandemic. The SARB’s monetary policy thus remains in line with longer-term trends if we look beyond the extreme measures taken during 2020. Consumers and borrowers should, however, be aware that further rate hikes by the central bank are a possibility in coming months. We also expect upward consumer price pressures to remain in place for several months. The effect of this is seen in a sharp decline in consumer confidence, most recently reported by the FNB/BER Consumer Confidence Index. As consumers and economies adapt to these new conditions, confidence levels will also recalibrate.”

Mamello Matikinca-Ngwenya, FNB Chief Economist says, “The monetary policy committee’s (MPC) 75bps hike was slightly above our and the consensus expectation for a 50bps hike. The MPC has opted to further front-load interest rate hikes, which reveals the pressure on the local monetary policy authority to get ahead of elevated inflation and inflation expectations, avoid a significant narrowing of the interest rate differential between SA and key trading partners, while also confronting risks to growth. SA has not bucked the trend of upside inflation surprises, and this has broadly resulted in a lift in expected inflation. The rise in inflation expectations is of particular concern to the MPC because it tends to be stickier than supply-driven inflation.”

“Also, the MPC is concerned about second-round effects from supply-side pressures, which will drive core inflation higher. Furthermore, the aggressive lift in interest rates in the US has implications for the interest rate differential between SA and the US, the narrowing of which makes SA assets less attractive. However, recession fears are growing as the aggressive tightening in global financial conditions has exacerbated the impact of resurgent waves of Covid-19 (specifically in China), supply chain disruptions, and the Russia-Ukraine conflict on the momentum of global growth. This global backdrop is worsened by local dynamics such as the KwaZulu-Natal (KZN) floods affecting the 2Q22 staring point and loadshedding impeding activity. Overall, this imposed a policy dilemma for the SARB, which has a primary mandate of maintaining inflation between 3% and 6%, preferably 4.5%, with a secondary interest in balanced and sustainable growth. However, the MPC remained firmly focused on their primary mandate and aimed at containing inflation expectations to avoid structurally higher inflation, which makes SA less competitive,” concludes Matikinca-Ngwenya.


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