Repo rate up to 7.25%: what higher borrowing costs mean for farmers and food prices

South African farmers could face further pressure from rising input and borrowing costs following the Reserve Bank’s decision to increase the repo rate by 25 basis points, with Standard Bank warning that higher production costs could eventually filter through to food prices.

Maile Matsimela, digital editor at African Farming

“The unanimous decision by the South African Reserve Bank to raise the benchmark repo rate by 25 basis points was widely expected, given the South African consumer inflation number increased up to 4.4% in August, outside of the target range of 3% set by the Reserve Bank,” said Brendan Jacobs, Head of Agribusiness for Business and Commercial Banking at Standard Bank South Africa.

He said geopolitical conflicts in the Middle East were contributing to pressure on key agricultural inputs, particularly fertiliser and diesel.

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Higher costs could filter through to food prices

For farmers, the higher interest rate comes at a time when production costs are already under pressure. A higher repo rate increases the cost of borrowing, potentially affecting farmers financing machinery, infrastructure, working capital and other investments.

Jacobs warned rising operational and capital expenses were unlikely to remain confined to the farm. “As these operational and capital expenses surge, a portion of these costs will inevitably pass down the supply chain. As a result, we do expect an adverse impact on food inflation down the line,” he said.

This means pressure from higher financing, fuel, fertiliser and other production costs could eventually move through the agricultural value chain, affecting processors, distributors, retailers and ultimately consumers.

Price stability takes priority despite economic contraction

The rate increase comes against a weak domestic economic backdrop. “Despite the local economy contracting by 0.2% in the second quarter, the mandate of the Reserve Bank is to prioritise long-term price stability over short-term growth,” Jacobs said.

For the agricultural sector, the combination of higher interest rates and elevated input costs could place additional pressure on producers, particularly those dependent on finance to fund seasonal production, equipment and expansion.

Jacobs’ warning also points to the possibility that the full impact may not immediately be reflected in food prices, as higher costs work their way through the supply chain.

The extent of that impact will depend partly on how long elevated agricultural input and financing costs persist.