South Africa is heading for a big interest rate hike

 ·9 May 2022

South Africa is likely to see another interest rate hike next week, although the increase could be larger than previously forecast, say economists at the Bureau for Economic Research (BER).

“Against the global backdrop of more rapid policy normalisation and, importantly, the associated recent sharp weakening of the rand exchange rate, and the sustained upside risks to domestic inflation, we now expect the South African Reserve Bank (SARB) to hike the repo rate by 50bps next week,” the group said in a research note on Monday (9 May).

“This is a change from the previous view for a 25bps hike at the May policy meeting. The SARB’s decision is unlikely to be unanimous,” it said.

The forecast comes after the US Federal Reserve hiked its policy rate by 50 basis points (bps) last week, which was the biggest increase in more than twenty years – although some market players had bet on a 75bps hike this month.

Going forward, Fed chair Jerome Powell signalled that 50bps increases were also likely at the next two meetings (June and July), with a probable return to 25bps increment increases from September.

In the UK, the Bank of England (BoE) raised its policy interest rate by 25bps. It was the fourth consecutive meeting where the UK policy rate was increased. While these rate hikes were in line with the consensus expectation, some other central banks surprised by being more hawkish than expected.

This includes a 40bps interest rate hike by the Reserve Bank of India at an unscheduled meeting, and the Reserve Bank of Australia lifting by a bigger-than-expected 25bps. Some emerging market central banks – including Poland and the Czech Republic – hiked by 75bps, with similar hikes expected next month.

Furthermore, the European Central Bank (ECB) is now expected to join the rate-hike crowd as early as July, with above zero policy rates projected by the end of the year.

Hikes coming 

Jeff Schultz, senior economist at BNP Paribas South Africa, has also pencilled in hikes as South Africa faces a higher than expected inflation print.

“Notwithstanding temporary fuel levy reprieve in April and May, which could see CPI temporarily slow towards 5.8% in the following two months, we expect price pressures to prove more challenging by the middle of the year where we anticipate a more protracted breach of the SARB’s upper 6% target range again from June where we think headline inflation will struggle to come back towards the SARB’s 4.5% midpoint target until H2 2023.”

“This, we believe, could prompt the SARB to step up the pace of hikes from its May MPC meeting, where we expect 50bp hikes in May and July followed by steady, successive 25bp hikes in each meeting thereafter until May next year.”

Schultz added that the current excessive load shedding is unlikely to deter the central bank from acting to ensure the anchoring of inflation expectations at its current 4.5% midpoint. Eskom has warned the country could have more than 100 days of electricity blackouts this year because of outages.

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