Big interest rate hike looms in South Africa

South Africa’s inflation rate held steady near the ceiling of the central bank’s target range on the eve of what’s expected to be the biggest interest-rate hike in more than six years.

Annual inflation was 5.9% in April, unchanged from the prior month, Statistics South Africa said Wednesday in a statement on its website. That matched the median of 13 economists’ estimates in a Bloomberg survey.

While the South African Reserve Bank officially targets inflation in a band of 3% to 6%, its monetary policy committee prefers to anchor expectations close to the midpoint of the range.

The rate of price-growth, stoked by record-high fuel prices and rising food costs, has topped 4.5% for a full year, with the breach of the ceiling of the official target now creating room for an aggressive rate hike on Thursday.

After lifting borrowing costs by 25 basis points at each of its last three meetings to 4.25%, the monetary policy committee is expected to up the pace of tightening this week.

That’s as inflationary risks posed by a weaker rand and more hawkish stances by the US Federal Reserve and European Central Bank reduce the appeal of local assets for offshore investors, outweighing concerns about the deterioration in domestic economic growth prospects.

Of the 20 economists in a Bloomberg survey, 15 predict a half-percentage point increase, with the remainder expecting a smaller 25 basis-point hike. Forward-rate agreements starting in one month, used to speculate on borrowing costs, are fully pricing in a quarter-point increase, and have put the odds of a 50 basis-point move at almost 90%.

The implied policy rate path of the central bank’s quarterly projection model, which the MPC uses as a guide, last indicated a repurchase rate of 5.06% by year-end.

At the time, the Reserve Bank saw the economy growing by 2% in 2022 – a forecast that’s likely to be revised lower after deadly floods wreaked havoc in the KwaZulu-Natal province — the second-largest contributor to the nation’s gross domestic product – and the resumption of rolling power blackouts.

Read: 8 things that are more expensive in South Africa – and 3 that got cheaper

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Big interest rate hike looms in South Africa