Why the Reserve Bank’s next interest rate move could be better than expected
Counter to views that more rate hikes are on the way, Investec chief economist Annabel Bishop believes the central bank is more likely to put a hold on rates.
Bishop said this is because the US Federal Reserve paused its interest rate hike cycle at its latest meeting.
This view opposes some other economists and analysts who predict at least a 25 basis point hike in this upcoming Monetary Policy Committee (MPC) meeting next week on Thursday, 20 July.
Countering this, Bishop said that South Africa has already hiked interest rates by 4.75% in its rate-hiking cycle that started in November 2021
She said that inflation data – set to be released on Wednesday before the meeting – will likely show a slowing of inflation back within the target range of between 3% and 6%, and this will further inform the SARB’s decision.
“June’s CPI inflation is likely to fall to around 5.5% year-on-year, significantly affected by base effects from rapidly rising inflation of a year ago, and these statistical base effects will also influence the July inflation outcome, seeing it likely drop towards 4.5% year-on-year.”
“With a three to four-quarter lag between the impact of interest rates on the economy and inflation, the SARB also needs at least a pause in its interest rate hike cycle to assess the impact on both inflation and the economy,” said Bishop.
There is emerging evidence of ‘distress borrowing’ among households, with the financial vulnerability of consumers increasing while salaries and wages are well below inflation.
Bishop said lower wages and salaries are damaging consumer demand and is leading to demand-led inflation.
The economist expects that CPI will consistently remain at or very close to 4.5% year-on-year by March 2024.
“From this perspective, further interest rate hikes in South Africa are not needed.”
“However, what will also be key is the movements in the US interest rate cycle, particularly given the effect this has on rand depreciation, and so the risks for the inflation outlook,” said Bishop.
“With the SARB not hiking in July, and the US potentially hiking by 25bp – although we think it is possible that the Fed may choose to extend its pause in its interest rate hike cycle over July as well – South Africa would still remain below the US in terms of the actual rise in interest rates it has delivered.
“This would continue to undermine the rand, while US interest rate hikes add to market risk aversion, and so weaken risk assets, including emerging market currencies and so the domestic currency,” she said.
Bishop said that despite Investec foreseeing no hike this month or for the rest of the year – rand weakness could change this view.
When looking at the US market, which, through the rand, South Africa is linked, inflation has decreased for 12 consecutive months, however, it still remains high above their central bank’s target of 2%.
Adriaan Pask, the CIO at PSG Wealth, said that annual inflation eased in June this year to 3% – the lowest since March 2021 and below market expectations.
The Fed started hiking rates in March 2022 to combat surging inflation reaching rates to levels last seen in the 1980s, said Pask.
Other outlooks
Francois Stofberg, an economist at Efficient Group, opposes Bishop’s view, noting that the tighter global economy is likely to result in another interest rate hike.
He said, however, that it is unlikely that the SARB would increase rates by more than 50 basis points this year.
“As the outlook for above-target inflation and a stronger-than-expected (US) labour market persists, more restrictive monetary policy will be needed for a longer period. Consequently, many emerging markets and their currencies took a bit of a beating,” Stofberg said.
He said that tighter monetary policy in the US would possibly translate to more interest rate hikes in South Africa.
Addressing improving inflationary data, Nedbank reported that the MPC would still be cautious.
“Consequently, the SARB is forecast to hike rates one more time by 25 bps in July, taking the repo rate and prime lending rate to peaks of 8.5% and 12%, respectively,” Nedbank said.
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