U-turn for interest rate expectations in South Africa
Morgan Stanley has changed its call on South African interest rates and now expects the central bank to raise borrowing costs this week, saying renewed oil-price pressure increases the risk that inflation takes longer to return to its 3% target.
Analysts Andrea Masia and Arnav Gupta now expect the South African Reserve Bank to raise its policy rate by 25 basis points to 7.25% on 23 September, reversing their previous call for a hold.
They say a hike would be “insurance” against a sequence of supply shocks delaying inflation’s convergence to the target that would eventually affect inflation expectations.
The shift in view comes after a renewed rise in the oil price, which Morgan Stanley expects will prompt an upward revision to the SARB’s near-term inflation outlook.
The analysts said the case for tightening isn’t based on a deterioration in inflation expectations or evidence that the initial energy shock is spreading more broadly through the consumer-price basket.
Instead, the concern is that renewed energy-price pressure could keep inflation above target for a prolonged period.
“The longer that happens, the greater the risk that those expectations become unanchored,” Masia and Gupta wrote in a report to clients seen by Bloomberg.
They said the SARB is unlikely to tolerate that risk as it seeks to establish credibility around its inflation target, which it adopted last year.
Morgan Stanley argues that higher oil prices also weaken the effectiveness of a strategy of keeping rates unchanged for longer.
The rise in inflation would reduce real interest rates, eroding some of the restraint currently being provided by monetary policy.
The global backdrop also became less supportive of a South African hold when the Federal Reserve raised its benchmark interest-rate range by 25 basis points this week to 3.75% to 4%.
That followed rate hikes by the European Central Bank on 10 September, and the Bank of Japan on 18 September.
Morgan Stanley said a combination of higher global rates and oil prices would leave less room for the rand to absorb another adverse shock, although the currency has so far remained resilient.
Beyond next week’s meeting, Morgan Stanley expects the SARB to hold rates through 2027.
The analysts said markets are pricing about 75 basis points of additional tightening, but they see limited scope for South African short-term rates to fully reflect those expectations, given recent domestic data and their broader forecasts.
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