- With monetary guardians making clear the scale of their concern about inflation, the path has been laid for aggressive action
- CBE announces increased repo rates
Mbabane: The Central Bank of Eswatini (CBE) Monetary Policy Committee (MPC) on Friday (28 January) raised the benchmark repurchase rate by 25 basis points from 3.75% to 4%.
This means that the prime lending rate of commercial banks will increase to 7.50%, and marks only the second interest rate hike in three years as inflation remains a huge concern – and despite the economy still recovering from the fourth wave of Covid-19 infections driven by the Omicron variant.
First to announce the increase was the United States Federal Reserve chairman Jerome Powell fired the starting gun for potentially the biggest and fastest tightening of global monetary policy in years.
Local economist Thembinkosi Dube, as reported by the Times Sunday not ruling out rate hikes at every meeting for the rest of 2022. Other central banks, including the Bank of England, are set to raise their own benchmarks over the next week, and more have indicated they will follow in the coming months.
With monetary guardians making clear the scale of their concern about inflation, the path has been laid for aggressive action.
The pressure to increase the rates was mounted when South Africa reserve bank announced its new rates on Thursday, where they increased by 25 basis points landing rates and prime rates at 7.50 %.
The Central Bank of Eswatini is of the view that the increase in interest rates will curb capital outflows while at the same time, interest rates will supportive to economic growth. The bank will further continue to monitor international and domestic development that influence the movements of inflation and will act appropriately in line with its mission to foster price and financial stability that is conclusive to the economic development in Swaziland.
Although the headline remain moderate, the bank revised its inflation forecast to 4.03 per cent for 2022 from 3.78 per cent forecasted in November 2021 and 3.88 per cent (from 3.87 per cent) for 2023.
The central Bank of Eswatini also shared that, as at 21 January 2022, the country’s stock of reserves stood at E9.6 Billion, enough to cover an estimated 3.8 month of imports.
South Africa shift
In South Africa, Adriaan Pask, chief investment officer at PSG Wealth said, four out of five committee members voted in favour of the rate hike, while the GDP growth forecast was kept unchanged at 1.70% for 2022 and 1.80% for 2023. Officials also noted that the possibility of a faster normalisation of global policy rates poses a grave risk, said Pask who was quoted by Business tech yesterday.
He further noted that the bank revised its headline consumer price inflation forecasts to 4.90% for 2022, 4.50% for 2023 and 4.50% for 2024, unchanged from the previous meeting. “The upward revisions in these expectations came as Eskom plans to increase its prices by 20.50% in April 2022, following a 15% increase in 2021,” he said.
“The increase in interest rates was broadly in line with our expectations,” said Pask. “Especially after the case for a rate hike grew last week when inflation data for December 2022 came in higher than expected at 5.90%, close to the top of the bank’s 3%-6% target range”.
“However, we have previously communicated that should the MPC decide to raise borrowing costs to contain prices, the changes will most likely be small and gradual.”
Pask said that a 25 basis point hike every few months, will not be a shock for economic growth or the local market. “Market participants will continue to be sensitive to any developments relating to unemployment, wages, inflation, and interest rates, therefore investors should also expect heightened volatility over the next few months.”
Jeff Schultz, the senior economist at BNP Paribas South Africa, said that the Reserve Banks’ quarterly projection model (QPM) indicates something closer to its base case of five 25bp rate hikes in 2022 and three 25bp hikes in early 2023 – with its end 2022 and end 2023 implied policy rates at 4.91% and 5.84% respectively.
“Importantly too, a 50bp rate hike was not discussed, further solidifying that it will for the time being adopt a gradual normalization approach,” Schultz said.
Sanisha Packirisamy, an economist at Momentum Investments said that given the likely accelerated global interest rate path, local interest rate hikes are expected to be front-loaded to keep SA inflation expectations anchored.
“The SARB’s internal quarterly projection model (QPM) predicts interest rates will end 2022 at 4.9% (relative to our own estimates of 4.75%) and 5.84% by the end of 2023 – compared with our projection of 5.75%.”
Reza Hendrickse, portfolio manager at PPS Investments said that the decision to increase rates reflects the committee’s view that there are upside risks to inflation, which for now is expected to be above the mid-point of the target band this year.
“These risks include the prospect of tighter financial conditions globally, in response to what could be enduring inflationary pressures. In addition, oil prices are rising steadily, alongside elevated electricity and administered prices locally.”
The SARB once again revised its GDP growth forecast for 2021 downwards, from 5.2% to 4.8%, with better than expected fourth-quarter growth having been more than offset by worse than expected third-quarter growth.