Expect a big interest rate hike this week: economists

 ·19 Jul 2022

South African businesses and consumers should plan for a big interest rate hike this week – with more to come in the months ahead, economists warn.

The South African Reserve Bank’s monetary policy committee is set to meet this week, with analysts still waiting for Statistics South Africa to publish its June inflation numbers on Wednesday (20 July) before making a final forecast on how much rates will increase by.

Predictions from Finder’s panel of 26 economists point to a 50 basis point hike being the most likely, with the majority (88%) of experts pencilling this in.

A Reuters poll of 23 economists also showed wide expectations that a 50bp hike will be announced. 19 of 23 economists expected a half-point hike to 5.25%, with the other four forecasting a 75bp increase.

The poll found a median 65% probability of a 50 basis point rise and 35% chance of 75 basis points.

“We expect the SARB to hike by 50 basis points in July and September before returning to 25 basis points increases afterwards,” said Johannes Khosa at Nedbank.

While the baseline scenario from the SARB was initially for rate increases of 25 basis points at each of its next three meetings this year – including July – the possibility of raising by 50 basis points is ‘not off the table’, SARB governor Lesetja Kganyago said in an interview with Bloomberg TV at the end of June.

The SARB’s hike path of a three-quarter percentage point increase by the end of the year would be the biggest since September 2002, when the South African central bank lifted the benchmark repurchase rate by 100 basis points.

However, economists and investors believe the hike path will be higher, with higher than expected levels of inflation driving the charge.

“Following its historic pattern, the dollar has been gaining considerable momentum against most other currencies, as the US central bank, the Federal Reserve (Fed), has been increasing interest rates at a much more rapid pace than most other countries have been able to,” said Dr Francois Stofberg, senior economist at the Efficient Wealth.

“Not even the South African Reserve Bank’s in-step increases have been able to do much to prevent the deterioration of the rand. Some analysts even expect the SARB to continue increasing interest rates by another 2% in 2022: I think that is a bit unnecessary and, as we have seen, it will not do a lot for inflation or the rand.

“Therefore, plan for another 2%, but expect at least another 1%.”

The risk of a less transitory rise in inflation and higher inflation expectations, and the more aggressive policy tightening in advanced markets, should result in the SARB further frontloading interest rate hikes, FNB said.

“We now expect 50bps hikes in July, September and November, bringing rates to 6.25% by end of 2022. We pencil in another 25bps in January 2023, which will bring the terminal rate to the pre-pandemic level of 6.5%.”

Chief economist at Investec Annabel Bishop said the US interest rate hike increases the likelihood of a 50bps hike.

“Currently, we continue to expect a 50bp lift in SA’s repo rate from the MPC in July, with the SARB likely to follow the direction, but not necessarily the exact moves of the FOMC, which has hiked in consecutive 25bp, 50bp and 75bp tranches so far this year.”

BNP Paribas chief economist Jeff Schultz agreed the SARB will and should hike the rate in July but thinks an increase of 75 bps is needed.

“With headline inflation likely to head north of 7.0% from June and with the SARB’s primary mandate of price stability, the SARB is likely to act more decisively to nip rising inflation and inflation expectations in the bud sooner rather than later in order to avoid a larger inflation problem down the line which could necessitate even bolder, more economically damaging policy action.”

PwC South Africa senior economist Christie Viljoen expects the rate will increase several times over the next few years as monetary policy normalises to pre-Covid levels.

Economists from Alexforbes said that elevated inflationary pressures resulting from geopolitical tensions and the risk that comes with the current domestic wage demands, effects of the floods in KwaZulu-Natal and load-shedding will likely concern policymakers, particularly with future inflation expectations having de-anchored from the 4.5% midpoint target.

“The overall risks to the medium-term growth outlook are assessed to be balanced, while the risks to the inflation outlook are assessed to the upside. While consensus expectations are for the SARB to frontload interest rates, the implied policy rate path of the central bank model still points to a gradual normalisation in monetary policy through 2024,” it said.

The group anticipates a 50bp hike in rates on 21 July.

Read: South Africa testing ‘digital rand’

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