The South African Reserve Bank’s (SARB’s) decision to hike interest rates by 25 basis points to 4.25% on Thursday (24 march) came as little surprise, but commentary surrounding the increase indicates that steeper hikes could be on the way, says Jeff Schultz, senior economist at BNP Paribas South Africa.
Schultz pointed to the fact that two of the SARB’s monetary policy committee members were in favour of a 50 basis point hike.
“We believe that this is a nearly signal of a change in strategy within the MPC, opening the door for a faster normalization of rates compared to our already above-consensus forecasts,” he said in a research note on Friday (25 March)
“We now forecast the SARB to raise rates by 50bp in the May and July versus our prior 25bp hike assumptions. We see policy rates ending 2022 at 5.75% and a higher terminal rate of 6.50% by end-2023.”
Schultz added that frontloading hikes when the rand is strong and the economy is benefitting from strong terms of trade should gain support across a still divided MPC over the coming months as the bank looks to build buffers into 2023.
“We think this makes it easier for the central bank to hike more aggressively from its next scheduled meeting in May, as the committee looks to nip inflation expectations in the bud at a time when the economy and asset prices are stronger to withstand a slightly faster pace of tightening.
“At the same time, it looks to build more policy buffers in the event global growth concerns begin to build into 2023.”
More hikes in 2022 are a given
FNB also believes that further hikes are likely for South Africa for the remainder of the year – albeit at the previously forecast 25bps level.
“The MPC’s decision to hike the repo rate by 25bps to 4.25% was in line with our and consensus expectations. Recent upward adjustments to inflation forecasts should place further upward pressure on interest rates, and additional 25bps hikes are anticipated at each of the remaining meetings for this year,” said Mamello Matikinca-Ngwenya, FNB chief economist.
“We remain cognisant that while the MPC has given guidance that it aims to contain inflation expectations and prevent steep interest rate hikes in future, it will also avoid choking the ongoing fragile economic recovery.”
Matikinca-Ngwenya added that South Africa’s economic recovery faces several headwinds from persistent issues such as energy shortages and geopolitical tensions.
In addition, consumer and business confidence remains depressed and the labour market is not expected to be very supportive to the recovery, she said.
“Furthermore, the spike in the cost of living should dent discretionary spending. Consumer inflation has been lifted by elevated fuel, food and electricity prices – all of which are considered supply-side inflation which the central bank should theoretically look through.
“However, a larger proportion of higher input costs could be passed onto consumers and the petrol price shock could further lift inflation expectations. The MPC will continue to be concerned by this, but weaker growth should support a gradual hiking cycle.”
Hikes likely to continue into 2023 and 2024
The Quarterly Projection Model (QPM) continues to reflect a steady rise of the repo rate and hikes are likely to continue into the next year, Nedbank said.
“The QPM shows increases of 25 bps at each of the remaining meetings in 2022 and hikes totalling 100 bps in 2023 and 50 bps in 2024. The tightening would take the repo rate to 6.75% and the prime rate to 10.25% by the end of 2024.”
It also acknowledged the shift in the MPC’s voting pattern which could indicate a more hawkish stance in the coming meetings.
“However, we still expect the MPC to stay on the path reflected by the QPM during 2022, although the model remains a policy guide and does not necessarily suggest a predetermined path of interest rates
“The upside risks to inflation are a significant concern. A higher pass-through of elevated fuel and grain prices to core prices and faster paces of interest rates normalisation by the major central banks would likely prompt the SARB to hike at a faster rate than currently anticipated.”