What to expect from South Africa’s interest rate meeting this week

Much of this week’s economic focus will be on the Reserve Bank’s Monetary Policy Committee’s  (MPC) meeting on Thursday (22 July), with analysts noting that the review will be a strong economic indicator, given the recent strife seen domestically.

The upcoming MPC preview will be one of immense importance as some adverse domestic inflation readings and volatile expectations about global inflation and monetary policy dynamics will shift outcomes, said Peter Worthington, senior economist at Absa.

“The market is now pricing in a 40% chance of a 25 basis point (bps) hike at the upcoming MPC, and 140 bps of tightening over the next 12 months.

“In May, the market was pricing in only 129 bps of tightening over 14 months, and in March, it pencilled in 120 bps over 16 months.”

However, economists are broadly confident that South Africa will only see its first interest rate hike in 2022.

While growth in the first quarter came out stronger-than-expected, high-frequency data until May remained muted, with the recovery in industrial activity slowing due to power outages, Nedbank said in a research note on Monday.

The bank noted that risks to the inflation outlook have tilted to the upside, though, driven by concerns over food and fuel supplies and increased insurance premiums.

A sustained high level of global inflation and oil prices could also weigh on domestic inflation over the forecast horizon, it said.

“In light of the current developments locally, the economy remains extremely vulnerable. We, therefore, expect the MPC to hold off any rate hikes this year, postponing the first hike of 25 basis points to early 2022, followed by three more hikes of 25 bps each in the first half of 2022.”

This was echoed by analysts at Stellenbosch Univesity’s Bureau for Economic Research (BER), who said that a rate hike was unlikely this week.

However, the BER said that it still expects the central bank to comment on the recent violence and looting in South Africa and what it means for the economy.

“It will be interesting to see the bank’s commentary on the impact on the economy and inflation of last week’s developments.

“We expect the MPC to communicate that their contribution to the economic recovery is to keep the policy interest rate accommodative for the time being.

“Given the still fairly benign South African inflation outlook, this would be the appropriate response to last week’s events.”

Analysts are largely unanimous on a hold

97% of economists in a poll conducted by Finder’s also believe that the Reserve Bank will hold rates.

Several panellists, including head of South African economic research at Standard Bank Elna Moolman, said the rate will and should hold while the economy remains in recovery mode.

“In our view, the economy still needs as much as the policymakers can prudently provide.

“The SARB is supporting the economic recovery prudently by keeping interest rates at multi-decade lows, while the inflation forecasts generally drift around the mid-point of its 3-6% target range.

“There is at this stage no inflationary reason to hike interest rates, so the SARB can prudently keep monetary policy accommodative,” she said.

However, one panellist, senior lecturer at the Tshwane University of Technology, Mulatu Zerihun, thinks the bank will and should cut the rate by 50 basis points at the upcoming meeting.

“Such a slight cut by 50 bps on the policy rate will assist to contain inflation at its target range for the remaining months of the year 2021.

“In addition, it halts the adverse effects of higher prices for food, electricity, and oil in the country,” he said.

One in five panellists (22%) say the rate should move, with 16% recommending a rate cut and 5% recommending an increase.

Gordon Institute of Business Science Professor Adrian Saville is one of two panellists (5%) who think the bank will hold the rate, but recommend an increase.

“Inflation risk is real and rising. SARB mandate is to look after inflation and the purchasing power of the rand. Not to manage growth. Taylor Rule and other models make the case for a rate hike,” he said.

Increase still possible this year

While an increase in July seems unlikely, 27% of panellists think the SARB will increase the repo rate this year, 8% say we could see a hike as soon as September, with 19% forecasting a November increase.

However, the majority of panellists don’t think we’ll see a rate increase until 2022 (70%).  54% expect the rate to increase in the first half of 2022, while 16% expect an increase in the latter half.

Jeff Schultz, senior economist at BNP Paribas South Africa, said he expects the SARB to tee up a gradual normalisation cycle at its July MPC meeting, hiking in both September and November and taking the end-2021 repo rate to 4.00%.

BNP Paribas South Africa has added another 25 bps hike to South Africa’s 2021 policy rate profile.

“Stickier non-core prices in H2, a possible lowering of the inflation target in 2022 and our view that the central bank’s output gap assumptions should gradually narrow, underpins our forecast tweak,” it said.

“With CPI set to slow below the SARB’s current implicit 4.5% target midpoint from Q2 2022, we see the policy rate ending 2022 at 4.75%, still below the pre-pandemic level,” Schultz said.


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What to expect from South Africa’s interest rate meeting this week