3 things that will decide South Africa’s next big interest rate hike in July
South Africa’s higher-than-expected inflation data in June points to a further interest rate hike in July, but there is still some uncertainty about how much the central bank will hike by.
The South African Reserve Bank is now forecast to follow up the 50bps hike in May with another 50bps rise in July. Previously, a 25bps increase was pencilled in for July, said economists from the Bureau for Economic Research (BER) in a research note on Monday (27 June).
“Importantly, at this stage, we still expect the repo rate to peak at 6.25% (the current rate is at 4.75%), albeit that this point is now set to be reached earlier (first half of 2023) than projected before.”
“Why not a 75bps SARB hike in July in ‘sympathy’ with the Fed and central banks in countries like Chile, Mexico and Poland that have all recently upped the ante with moves of 75bps?”
Although this should not be ruled out, and will be assessed closer to the meeting, the BER said that there are at least three factors arguing against such an aggressive response in South Africa:
- Inflation: First is the lack of meaningful underlying (core) demand-driven inflationary pressure in South Africa, at least not yet. Related to this is weaker local growth momentum than in some of the countries where policy rates have recently been raised by 75bps.
- Rand: Second is the fact that the rand exchange rate has been relatively stable around the R16/dollar level in the wake of the Fed’s more aggressive stance. As a result, the rand is largely unchanged from the starting point (R15.88/$) for the currency used by the SARB in their forecast for the May interest rate meeting.
- Recession: Third is the likelihood that the global recession narrative is likely to ratchet up in the next month, which should soften expectations for the magnitude of global interest rate hikes. Already, global rate hike expectations were scaled back somewhat last week.
Bigger hike
Economists at BNP Paribas are less bullish and have pencilled in a 75bps hike in July.
“We have raised our forecasts for near-term rate hikes by the South African Reserve Bank – we now expect 75bp hikes at the July and September MPC meetings, up from our previous forecast of 50bp moves and well above the consensus expectation,” BNP Paribas senior economist Jeff Schultz said in a research note on Friday (24 June).
“In addition, we have raised our forecast of the SARB’s terminal rate by 50bp to 7% as inflation now looks set to be higher for longer, and is unlikely to fall back to the SARB’s 4.5% target midpoint before 2024.”
With inflation seen as the main threat to the economy, BNP Paribas forecast that most members of the Reserve Bank’s monetary policy committee are likely to favour raising rates to a neutral real level as quickly as possible to prevent a further rise in inflation expectations.
The bank now forecasts:
- A 75bps hike from the SARB in July;
- A further 75bps hike in the September meeting;
- A 50bps hike in November;
- A 25bps hike in January 2023
Read: South Africa faces a ‘frightening’ month – but it will get better: Nedbank
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