'Second rate hike paves the way for less hikes than expected over next 3 years'

Bruce Whitfield talks to economist Isaah Mhlanga (Alexander Forbes) after the Reserve Bank announces an increase in the repo rate.

The South African Reserve Bank (Sarb) has raised its repo rate by 25 basis points to 4%.

This brings the prime lending rate to 7.5%.

The decision was announced by Governor Lesetja Kganyago after Sarb's Monetary Policy Committee held its first meeting of 2022.

It's the second consecutive increase following a 25-basis-point hike last November which came after almost three years of rate cuts.

RELATED: Reserve Bank has to respond with interest rate hikes as inflation jumps to 5.9%

Thursday's announcement was widely expected as inflation continues to spike.

Kganyago warned that higher food, fuel and energy prices will keep inflation at elevated levels.

[THREAD] Core inflation was 3.1% in 2021, & is forecast to rise to 3.8% in 2022 (up from 3.7%). It is projected to rise to 4.5%, despite a still low rate of services price inflation & unit labour costs.Core inflation forecasts for 2023 & 2024 are unchanged at 4.4% & 4.5%#MPCJAN22 pic.twitter.com/mxamVsbqry

— SA Reserve Bank (@SAReserveBank) January 27, 2022

[THREAD] Core inflation was 3.1% in 2021, & is forecast to rise to 3.8% in 2022 (up from 3.7%). It is projected to rise to 4.5%, despite a still low rate of services price inflation & unit labour costs.Core inflation forecasts for 2023 & 2024 are unchanged at 4.4% & 4.5%#MPCJAN22 pic.twitter.com/mxamVsbqry

— SA Reserve Bank (@SAReserveBank) January 27, 2022

Bruce Whitfield interviews Isaah Mhlanga, Chief Economist at Alexander Forbes.

We could characterise this hike as a dovish hike, because if you check the expectations from the November MPC they expected four rate hikes in 2022. Now that has been cut by one rate hike.

Isaah Mhlanga, Chief Economist - Alexander Forbes

Also if you take 2023 and 2024, there is a 40 basis point reduction in the expected interest rates, so while they are frontloading the hikes - two consecutive hikes from November to January - it means that over the next three years we are expecting now to get less interest hikes compared to what they had planned at the November MPC.

Isaah Mhlanga, Chief Economist - Alexander Forbes

This is primarily because, if you look in terms of the output gap, the difference between the actual growth and potential growth is still much wider year relative to what they expected last year.

Isaah Mhlanga, Chief Economist - Alexander Forbes

Also, the sources of the inflation drivers are largely supply-side-driven... oil prices... food price inflation, which the Sarb has no control over...

Isaah Mhlanga, Chief Economist - Alexander Forbes

Critics of the rate hike decision should also take more of a global view he says.

The rest of the world has been hiking interest rates, so in order to continue to attract capital inflows we need our interest rate to be competitive in a global sense and that's what the Reserve Bank is doing, given it cannot help growth that much in the current environment.

Isaah Mhlanga, Chief Economist - Alexander Forbes

Listen to Mhlanga's insights on The Money Show:

This article first appeared on CapeTalk : 'Second rate hike paves the way for less hikes than expected over next 3 years'

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