South Africans are in for a tough 2023: economists

The South African Reserve Bank is expected to hike interest rates this week – marking the seventh rate hike since the current hike cycle started in November 2021.

Citadel chief economist, Maarten Ackerman, said that the SARB’s Monetary Policy Committee is likely to ‘gift’ the country with another 75 basis point hike, taking the repo rate to 7.00%.

Ackerman said the SARB will likely continue hiking interest rates to mirror what is happening in the rest of the world, particularly looking to the US Federal Reserve’s (Fed) actions in the current environment.

“Although South Africa’s inflation is not as high as the United States (US), we are nearing peak inflation,” he said, adding that the effect on the South African economy is unfortunate.

“The demand side is already weak, and our consumers are under pressure for various reasons like high-interest rates, high unemployment, high debt levels, and the increasing cost of living.”

Worryingly, the economist noted that rate hikes typically take months to impact the real economy – usually taking six to nine months to show up in the data.

This paints a difficult picture for consumers in mid-2023, he said.

“Since the SARB is almost a mirror image of the Fed, which is likely to keep hiking into next year before slowing down, as they get more confident that inflation is slowing, one can assume that as South African inflation drops below the upper target early in 2023, the SARB will also start to slow the speed of hiking rates.”

Ackerman said things may begin to stabilise to the target range 0f below 6% in the first half of 2023, which will allow the SARB to start slowing or even pause the pace of hiking for a while.

According to Jeff Schultz, senior economist at BNP Paribas South Africa, however, it’s still too early to call a ‘pivot’ in the Reserve Bank’s hiking strategy.

“We expect a cautious tone, with the central bank unlikely to commit to any imminent ‘pivot’ until it is confident its 4.5% target midpoint is achievable in its forecast horizon,” he said.

Schultz said that the SARB is not out of the woods when it comes to bringing inflation back sustainably to its 4.5% target midpoint and estimates that headline CPI will struggle to come back to within the upper 6% target range before late Q2 2023 and will only approach its 4.5% midpoint by the end of 2024.

“While there is an argument for a shift down in the pace of SARB hikes to allow for monetary transmission and to acknowledge a souring domestic growth outlook, we believe that the SARB is likely to view that it has merely done the minimum up to this point by only recently fully unwinding the 275bp in cumulative cuts it delivered in response to the Covid pandemic,” he said.

Growth is an obvious concern, the economist said, with GDP estimates revised lower for 2022 and 2023, but the bigger worry for the Reserve Bank is persistently high inflation.

BNP Paribas, as well as economists at Nedbank, expect inflation to have eased slightly in October – to 7.4% – but this is likely to be overshadowed by stronger momentum in core inflation, Schultz said.

“The SARB will also be sensitive to the fact that its own two-year inflation outlook looks to be at least 50bp higher than the two years preceding the pandemic…Therefore, we expect the central bank to be steadfast in its view that it still has more work to do to ensure that CPI and inflation expectations continue to shift lower.”

With the US Fed’s hike cycle far from over, and a global economic recession on the cards for 2023, the economists noted that South Africans are in for a turbulent time, with rand volatility and at least another 50 basis point rate hike on the cards for the new year.

“For now, we expect the SARB to remain firmly in risk management mode, intent on building buffers for an ever-uncertain global and domestic economic outlook,” Schultz said.

Read: What to expect from the interest rate hike in South Africa this week