Interest rate hikes are coming: economists

There is a growing risk that the South African Reserve Bank (SARB) could hike interest rates in November – but economists are still of the view that a hike cycle is only likely to be seen in Q1 2022.

In a research note on Wednesday (20 October), Nedbank noted that headline inflation edged up slightly in September due to several global factors.

“Concerning factors include global supply chain disruptions and port congestion which have resulted in higher shipping costs. The global oil prices have been shooting through the roof as supplies remain constrained while demand has improved.

“These costs have presented themselves in the surge in producer inflation. Global food inflation has shown no definite signs of abating and will probably also contribute to higher inflation in the near team.

“Over the past week, the rand has gained some ground as risk-on sentiment was buoyed by evidence that the global recovery remains intact. Still, we expect the rand to take some strain once the US Fed begins tapering bond purchases.”

Given these cost-push pressures, Nedbank said that inflation is forecast near 5% for the remainder of the year and the early part of 2022.

However, it warned that the country’s subdued economic recovery would contain upside risks. Once 2020’s low base is entirely out of the picture, inflation will likely ease again, hovering around the 4.5% midpoint of the SARB’s target range, it said.

“Within this context, we still expect interest rates to remain unchanged for the rest of this year, with the hiking cycle expected to start early next year. However, the risk of an interest rate hike in November has increased in recent weeks.”

This was echoed by Sanisha Packirisamy, an economist at Momentum, who noted that contained headline and core inflation, and longer-dated inflation expectations, could allow the Reserve Bank to stave off interest rate hikes until Q1 2022.

“While we cannot rule out the risk of a November hike, the South African Reserve Bank may also be discouraged to raise interest rates too early given the negative effect on sentiment and cyclical growth outcomes,” she said.

However, RMB chief economist Ettienne le Roux said that there could be some benefits if the Reserve Bank does opt for an earlier than expected interest rate hike in November.

“If the Monetary Policy Committee opts to raise the repo rate by 25bp on the 18th (of November), it probably would be motivated on the basis that sharply higher food and petrol prices have increased the risk of a notable deterioration in market measures of inflation expectations in the period ahead,” he said.

“Alternatively, a decision to act as early as November could also reflect a tactical move which is judged to be small enough not to unduly damage the real economy, while at the same time also serving to reaffirm the bank’s inflation-fighting credibility.”

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