A key change means interest rate hikes are coming for South Africa, say economists

Accommodative monetary policy in the US has been benefiting emerging markets for months, but the tide is now shifting, say analysts at the Bank of America (BofA).

In a research note on Thursday (4 November), BofA noted that the US Federal Reserve announced the start of tapering this month, signalling change for international markets.

“Although still uncertain, Fed hikes will likely start sometime in 2022 depending on US inflation and employment dynamics – inflation at 2% or higher and the maximum employment target. Rising US rates are negative for emerging currencies, including the rand.

“The potential repricing of assets could weaken the rand, adding some pass-through to inflation. Thus, there is pressure on the South African Reserve Bank to keep up with portfolio flows and inflation in check, requiring policy rate upward adjustments.”

While recent monetary policy committee meetings (MPC)  have been unanimous in holding the policy rate unchanged, BofA said that it sees the tide shifting due to changes in the global environment and higher oil for longer pushing up other broader prices and specifically core inflation.

“We view higher inflation as persisting into Q1 2022. Indeed, core inflation is set to rise substantially, which should set the policy rate hikes in motion. We see the reaction coming from the second-round effects on broader prices.”

The group added that the November MPC meeting is likely when the SARB switches into a more hawkish mode.

“MPC members should start to vote differently while statements start to adopt a hawkish tone. The tighter monetary conditions globally will likely take effect in the next few weeks. In the interim, the SARB has room to observe the adjustment and start acting in the New Year. So we do not think there will be a hike in November. Yes, headline inflation is higher than the 4.5% mid target point.

“We think its the core inflation trend thats likely to drive a hike in January. We revise our view to a hike in January 2022 from March with cumulative hikes of 125bps for 2022 and 100bps again for 2023. We think the terminal rate will likely be at 6% in 2024. “

However, rates are unlikely to go back to pre-pandemic levels, it said. 

Read: New pension changes proposed for South Africa

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A key change means interest rate hikes are coming for South Africa, say economists