To hike repo rate by 50bps or 25bps, that is the question

South Africa’s Monetary Policy Committee (MPC) will hold its first meeting of the year to decide on interest rates on Thursday, and while economists agree that the central bank will continue to hike rates, they are split on the size of the increase.

Last year was characterised by runaway inflation, spurring reserve banks of major economies around the globe to put on an aggressive fight to curb it by raising interest rates.

The South African Reserve Bank (Sarb) has raised interest rates by a cumulative 350 basis points (bps) since the end of November 2021, taking the prime lending rate to the current 7% – higher than pre-pandemic levels.

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Although many economists and market watchers are pricing in another increase come Thursday, they believe the Reserve Bank is nearing the peak of its hiking spell – with 50% of the panelists in a Finder.com Sarb Repo Rate report saying the peak is here.

Another 36% believe the peak will come only in March.

The report quizzed 27 panelists, with 59% forecasting that the rate will increase by 50bps, and 33% factoring in an increase of 25bps.

Almost 19% are of the opinion that the rate should be left unchanged.

“While risks of a final 50bps hike in the cycle are elevated, we think there is good reason to pause and assess the impact of historical tightening. A stronger FX and lower oil prices create the breathing room to do so,” Andrea Masia, senior economist at Morgan Stanley, says.

Due to sticky inflation, a vulnerable currency outlook, and disinflation concentrated on fuel prices as core inflation continues to climb, BNP Paribas chief economist Jeff Schultz thinks an increase by 50bps is due.

“Though the decision is likely to be a close call and split between those advocating for 25bps and those advocating for 50bps, we think that persistently large uncertainties that remain on the domestic inflation outlook will sway the committee to buy itself a bit more insurance and hike 50bps,” he says.

Despite consumer price inflation (CPI) slightly cooling, and the latest print for December showing a decrease to 7.2% from 7.4% in November, the Sarb will likely continue to keep its laser-sharp focus on inflation, in attempts to bring it back to the midpoint of its 3% to 6% target band, says Jan-Daan van Wyk, investment management senior analyst for Stonehage Fleming.

“… the MPC wants to avoid the perceived error of developed market central banks in underestimating the magnitude and pervasiveness of inflation,” he adds.

“The sticking point, however, will be whether that hike is at 25bps, or 50.”

Read: Rand up after inflation data

Before last week’s “surprise” inflation data, a 50bps increase was plausible, according to the Momentum Investments macro research desk.

“The downward surprise in headline and underlying inflation, subdued services inflation, and signs of easing global inflation point to a strengthened case for a small rate rise of 25 bps at the upcoming meeting.”

By the end of the first quarter, Momentum expects the interest rate to peak at 7.5%.

FNB’s economic unit expects the Sarb to follow the US Federal Reserve and the Bank of England, which both had a 50bps rise in interest rates.

“This, along with domestic inflation expectations that are yet to sustainably revert to the 4.5% anchor, should prompt further hiking by the SARB this month. We expect the pace of hikes to slow to 50bps,” says FNB.

“With inflation potentially falling closer to target in 2H23, the MPC would have created sufficient policy space to support the economy towards year-end,” it adds.

Mokgatla Madisha, head of fixed interest at Sanlam’s investment management arm, while saying the bank should place a brake on hiking, is forecasting a 50bps increase, “given central banks are in policy tightening mode”.

“… policy acts with a lag and we are yet to see the impact of last year’s rate hikes on the economy, furthermore inflation in South Africa has clearly peaked and with year-end forecasts of inflation close to 5%, the current repo rate of 7% is sufficiently restrictive,” says Madisha.