Energy Crisis Contributes to Surprising Interest Rate Hike in South Africa

South African consumers were left in shock on Thursday as the South African Reserve Bank Governor, Lesetja Kganyago, announced a significant 50 basis points increase in the repurchase rate, raising it from 7.25% to 7.75%. Consequently, the prime lending rate in South Africa has moved from 10.75% to 11.25%.

The central bank’s aggressive rate hiking trend aims to curb inflation, with the previous eight committee meetings voting for an increase. The Reserve Bank has now raised rates for the ninth time in a row, totaling 425 basis points since November 2021.

However, inflation remains higher than the bank’s target range, primarily due to the rolling power cuts imposed by struggling state-owned power utility Eskom.

Factors Behind the Rate Hike

  • Inflation read in February 2023 at 7%, well above the target range of 3% to 6%
  • Increases in energy, transport, and food costs are the main drivers
  • Food prices continue to rise due to farmers and food producers’ additional expenditures on alternative energy resources
  • Depreciation of the exchange rand adds to food price pressures

A Glimpse of Hope

Frank Blackmore, lead economist at KPMG, believes that the South African Reserve Bank is at or nearing the peak of its monetary policy tightening cycle. He expects significant decreases in inflation to take place over the second part of the year, provided there are no further shocks to underlying food and energy prices.

Also Read:   Dis-Chem's Profit Dips Amidst Load Shedding and Economic Squeeze

Depending on the size and speed of this reduction in inflation over the remainder of the year, interest rates could even decrease by the end of the year, according to Blackmore.

This content was generated by artificial intelligence - more information