What it will take for the Reserve Bank to stop hiking rates

 ·28 Nov 2022

The South African Reserve Bank (SARB) told economists on Friday (25 November) that it needs to see consumer inflation steadily decline to the 4.5% mid-point of its targeted range before it will consider pausing or stopping its current rate hiking cycle.

The central bank hiked rates by 75 basis points last week, taking the repo rate to 7.00% and the prime lending rate to 10.5%.

According to the Bureau for Economic Research (BER), the SARB’s tone following the rate hike heavily implies that more hikes are to come, with the economists now seeing the peak repo rate at 7.25% in 2023.

“Based on the Monetary Policy Committee’s (MPC’s) commentary on Thursday and Friday, there is now some upside risk to our view that the policy rate will be hiked by another 25bps in January to a terminal (peak) rate of 7.25%,” it said.

“(The SARB) session reiterated that a meaningful decline in the inflation rate is necessary before the MPC would cease hiking. Importantly, our current headline inflation forecast is for near-term CPI to remain sticky between 7 to 7.5%. Therefore, all else being equal, the MPC is most likely to increase the repo rate again during its next meeting in January.”

While this position by the central bank means indebted consumers are likely to remain under pressure in the medium term, the situation is not without its positive news.

The BER noted that, in contrast to the hawkish comments from MPC members and the near-term sticky inflation outlook, financial market developments over the past week were more constructive.

Notably, the rand exchange rate gained further ground, moving to stronger than R17/$ at one point after the US dollar came under some pressure as the latest Fed minutes supported expectations that the US central bank could slow down the pace of policy rate hikes at their next meeting in mid-December.

“Another domestic disinflationary impulse came from the oil price, with the 1-month Brent crude future falling below $84 a barrel. So far in November, Brent crude has declined by about $10 barrel or almost 12%,” the BER said.

Although the economic data releases from major economies were, in some cases, not as bad as expected over the past week, the oil price continues to be pressured by rising concern about global growth prospects in 2023, the economists said.

Renewed Covid lockdowns in China, which confirm that the economically damaging zero-Covid policy is still being pursued rigorously, were most likely an important catalyst for the lower oil price, the BER said.

“If sustained, less expensive oil and a stronger rand will bring down the rate of South African inflation at a faster pace than we currently expect.”

The lower oil price and stronger rand are already feeding through to local energy data, with the Central Energy Fund projecting a big drop in diesel prices for December – with a cut of R1.20 per litre on the cards for the festive season.

While this is not yet leading to a cut in the petrol price, even conditions for this market have improved, with a projected petrol price increase of R1.10 at the middle of the month dropping to an expected increase of 55 cents per litre.

Read: Big drop in diesel prices coming in December

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