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Interest rates rose by 75 basis points, the largest increase in over 20 years

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Nonhlanhla P Dube

On Thursday, the repo rate was raised by 75 basis points.

The repo rate is now 5.5 %, and the prime rate is 9 %. Three members of the monetary policy committee supported the raise, with one requesting a 100-basis-point increase and another requesting a 50-basis-point increase.

This is the largest increase since September 2002, when the repo rate was raised by 100 basis points in response to the emerging market crisis. The latest interest rate increase comes on the heels of a stinging inflation figure reported on Wednesday: consumer inflation reached 7.4 %, the highest level in 13 years.

The latest increase will increase payments by R950 per month on a new R2 million home loan at the prime rate. Since November of last year, the monthly payment on that mortgage has increased by about R3 000.

The Reserve Bank raised interest rates by 50 basis points in May

The significant rate hike puts further strain on many South African households, who are already dealing with rising food and fuel prices, mostly as a result of the impact of the Ukraine incursion.

According to Lesetja Kganyago, governor of the South African Reserve Bank, inflation continues to surprise the upside.

The bank now predicts headline inflation to be 6.5 % this year, up from 5.9 % previously. Kganyago cautioned that inflation expectations are rising, implying that employees will want bigger wage increases. This will increase inflation even further.

He cautioned that Russia’s battle in Ukraine is likely to last the remainder of the year and might have a substantial impact on world prices.

“Global producer price and food price inflation have continued to surprise higher in recent months, and this may continue,” he said.

By raising interest rates, the Reserve Bank hopes to reduce inflation by decreasing economic demand. Importantly, it must keep pace with significant interest rate increases in rich countries, particularly the United States. If the US raises rates higher than South Africa, the rand and capital inflows into the country may be destabilized.

Foreign investors can earn high-interest rates in rands, making local assets more appealing—but rapid US interest rate hikes are diminishing that edge. In reaction, the rand has already begun to fall, breaking R17/$ for the first time since 2020.

The US Federal Reserve is expected to raise its benchmark interest rate by 75 basis points next week in an effort to keep inflation under control.

Despite the impact of load shedding and flooding in KwaZulu-Natal earlier this year, the Reserve Bank raised its forecast for growth this year to 2.0 % from 1.7 %. However, it dramatically reduced its growth prediction for the following years, to 1.3 % in 2023 and 1.5 % in 2024, from 1.9 % in both years in May.

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Nonhlanhla P Dube

Nonhlanhla P Dube is a senior news reporter at Rateweb. Nonhlanhla is a student of International Relations at the University of South Africa. She reports primarily on personal finance and economics. You can contact her directly by email at nonhlanhla@rateweb.co.za

Published by
Nonhlanhla P Dube
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