Interest rates increased by 75 basis points – the biggest hike in almost 20 years

On Thursday, the 21st of July 2022, the repo rate was increased by 75 basis points.

The repo rate now stands at 5.5%, while the prime lending rate is firmly positioned at 9%. One member of the monetary policy committee requested a 100 basis point increase, and another preferred a 50 basis point increase, all three committee members supported the hike.

This is the biggest rate hike since the repo rate was increased by 100 basis points in the midst of an emerging market crisis in September 2002. The most recent interest rate increase comes in the wake of Wednesday’s sobering consumer inflation report, which showed that rates had risen to 7.4%, the highest level in 13 years.

The Reserve Bank raised interest rates by 50 basis points in May. The large rate hike adds more stress to the lives of many South Africans, who are faced with rising food and fuel prices.

The bank has raised its previous forecast for headline inflation this year from 5.9% to 6.5%. Experts warn that rising inflation expectations will lead to higher wage demands from employees. As a result, inflation will increase even more.

The Reserve Bank hopes to reduce inflation by reducing demand in the economy by raising interest rates. It must also keep up with sudden increases in interest rates in wealthy countries, especially the US. The Rand and capital inflows into the country could become unstable if the US raises interest rates higher than South Africa.

Local assets are more appealing due to the high-interest rates that foreign investors can receive in Rands, but this advantage is being eroded by the swift increases in US interest rates. In response, the Rand has already begun to deteriorate and has crossed the R17/$1 mark for the first time since 2020.

The SARS official rate of interest, as defined in section 1(1) of the Income Tax Act 58 of 1962 (the Act), therefore has also increased.

This means that where a loan is granted to an employee by his or her employer and no interest is charged by the employer, or where the interest charged by the employer is less than the official rate of interest, the difference between the amount which would have been payable if the loan was granted at the official rate and the amount actually paid by the employee, is taxed as a fringe benefit.

The SARS official rate of interest is the Repo Rate, plus 100 basis points (1%). The SARS official rate of interest is therefore adjusted to 6.5%.