Repo rate hike: 75bps or 50bps?

With South Africa’s headline consumer inflation coming in at 7.4% for June – 1.4 percentage points above the top end of the SA Reserve Bank (Sarb) target and hitting a 13-year high – the central bank may have no option but to hike the repo rate by 75 basis points (bps) on Thursday.

This would be the sharpest hike in almost two decades. The last time the Sarb hiked by 75bps was in September 2002.

Record-low real rate sets stage for aggressive SA hike
Price shock may spur biggest SA rate hike since 2002

Whether it is a 75bps or 50bps hike that Sarb Governor Lesetja Kganyago announces just after 2pm, it is likely to be a split vote by the bank’s five-member Monetary Policy Committee (MPC).

Several economists have been predicting a 50bps hike for the July MPC meeting, but that was before the higher-than-expected June inflation figure was published by Stats SA on Wednesday.

The latest Consumer Price Index (CPI) number of 7.4% comes off the back of spiralling fuel and food prices globally since the start of the year, which have been exacerbated by Russia-Ukraine war.

Consensus among economists and analysts was that the June CPI reading would come in at 7.2%, after breaching the Sarb’s 4-6% inflation target for May. CPI in May came in at 6.5%, well ahead of analysts’ forecasts of around 6.1%.

With inflation hitting multi-decade highs in key international markets, countries like the US have been forced to up rates by 75bps (at the Federal Reserve’s last meeting). While SA and several emerging markets started hiking repo rates earlier, the move by the US has rattled global markets and is fuelling forecasts of a US recession and possible global recession.

If the US Federal Reserve is forced to continue to take a hawkish stance on rates to bring inflation under control, the likes of the Sarb may follow suit, to keep the interest rate differential between SA and developed markets stable.