REPO RATE – 50 BASIS POINTS MORE THAN EXPECTED
Prof Andre Roux – Economist at Stellenbosch Business School
The decision by the Monetary Policy Committee of the SA Reserve Bank (SARB) to raise the repo rate should not have come as a major surprise. The extent of the increase, 50 basis points, was, however, more than market commentators expected. The weight of evidence and opinion supported an increase.
First, the domestic inflation rate remains firmly above the upper end of the target range of 3 to 6 per cent. This, along with the Constitutional mandate to protect the value of the currency, virtually compels the SARB to impose and adhere to a strict monetary policy, until such time that there is clear evidence that inflationary pressures are subsiding.
Secondly, the international trend for over a year has been to increase interest rates – for the same reasons as here. Should we fail to follow suit, then – all things being equal – the already beleaguered Rand exchange rate would come under further pressure.
Fortunately, the focus of the monetary policy stance has started to shift, as two questions arise: Have we seen the end of interest rate increases? And: When will rates starts falling?
Notwithstanding the constitutional and institutional arguments for a tighter monetary policy, there are equally compelling reasons to support a relaxation. With the SA economy being on the verge of a technical recession, along with double-digit food inflation, inordinately high levels of unemployment, high personal debt burdens, and persistent load-shedding, some leniency is easy to justify. Moreover, there is evidence emerging – globally and locally – that inflationary pressures might be softening.
Another important consideration is the fact that, by and large, monetary policy can only really have a bearing on the general price level via its influence on various monetary aggregates, which, in turn, are determinants of aggregate demand. Currently, however, a number of inflation-inducing forces fall outside the ambit of monetary phenomena. These include the international US$ price of oil, supply chain disruptions, high energy prices, rising labour costs, food prices, and other administrative prices. This puts into question the continued usefulness – in the current context – of interest rates as a rather blunt anti-inflationary policy instrument.
On balance, based on current knowledge and conjecture, there may be one more rate increase in May, followed by a sideways movement until the latter part of this year or early next year, when rates could start moving downwards.