SA Reserve Bank sees need to raise interest rates further – OUCH!

South Africa’s central bank sees a need to continue raising borrowing costs, even after hiking interest rates faster than its model suggests.

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As reported by The South African website, the monetary policy committee raised the benchmark repurchase rate by 0.75 of a percentage point on 22 September.

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According to Bloomberg, that was faster than the bank’s quarterly projection model indicated after its July meeting, when it showed two increases of 25 basis points each through the first quarter of next year, the South African Reserve Bank said on Tuesday in its six-monthly Monetary Policy Review.

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The South African Reserve Bank responded to the worst global inflation shock in a generation quicker than several of its peers and has raised the policy rate by 275 basis points since November.

Interest model is just a broad policy guide

Governor Lesetja Kganyago has repeatedly said the model is simply a broad policy guide.

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Lower inflation and ultimately lower interest rates could be achieved by implementing structural reforms that boost productivity growth, the Reserve Bank said.

Reforms aimed at alleviating South Africa’s energy crisis could raise real private investment in the energy sector by as much as 15% per year from 2023 to 2025 and raise economic growth by about 0.9 percentage points over the first year, the central bank said.

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“Investment in energy has the potential to crowd in other productive investments, creating a virtuous cycle,” the bank said.

State-owned power utility Eskom Holdings, which produces almost all of South Africa’s electricity, can’t meet demand and has imposed a record 120 days of blackouts so far in 2022, according to Bloomberg calculations.

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Load shedding, a local term for outages, is projected to shave 1 percentage point off economic growth this year.

The bank lowered its gross domestic product growth forecast to 1.9% from 2% in September.

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