Higher repo rate, what does this mean for you and your wallet?

What is behind the sudden repo rate hike?

In general, inflation rates are in most cases the primary tool at most country’s disposal to keep inflation in line with general growth in earnings and so that the economy can grow at a more natural rate rather than an inflated rate which will cause income gaps to broaden, more people pushed in to poverty and less inclusivity within a country’s economy.Of course, there are numerous other factors that need to be accounted for along with the above, but on a basic overview, that is the purpose a monetary authority is meant to fill. Now that we have a basic understanding of why interest rates are increased from time to time, we need to dig a bit deeper in to why the SARB has increased the South African Repo Rate.

Does the latest rate hike leave more uncertainty about South Arica’s economic growth?

On Thursday, 18 November, the SARB increased the repo rate from the record low level of 3.5% by 25-basis points to 3.75%. According to the SARB this rate hike was brought about by increasing concerns on inflation and consequently they have also raised their consumer price index forecast from 4.4% to 4.5% in 2021.

It is important to note that this 25-basis point increase comes after a continuous 275-basis point decrease in the repo rate since the start of the COVID-19 pandemic. The sentiment around this rate increased was very mixed as most economists had not expected a rate increase until 2022. This highlights the SARB’s concern over rising inflation concerns.

Is this the end of the road for the Rand?

At the time of writing the rand is R15.71 per U.S. Dollar. We can clearly see how volatile the rand has been around inflation data as well as interest rate data. Given the global concern on rising oil prices and our own local electricity costs and supply constraints, the future does not look all to bright for the South African economy.

Given the earlier than expected increase in the repo rate, the market is yet to effectively  price in the remaining 250-basis points that are still to come, meaning that there can still be some turbulent air to come for the Rand in the short to medium term as local fuel and electricity prices are at this stage one of the biggest concerns we face around our future economic growth.

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Caveat Capital MGMT (Pty) Ltd is a CATII – Authorized Financial Services Provider (FSP no. 24777) registered at the South African Financial Services Conduct Authority (FSCA).