Interest rate pain for South Africa this week: economists
South African households are facing yet another interest rate hike this week – and the numbers could come in worse than initially anticipated.
The South African Reserve Bank (SARB) will hold its Monetary Policy Committee (MPC) meeting this week, with an announcement in interest rates expected on Thursday (25 May).
Markets have suffered multiple blows in the last few weeks amid intensified load shedding and geopolitical missteps, which have severely strained the economy. According to the Bureau for Economic Research (BER), as a result of this, the central bank is now more likely to push rates higher than previously expected.
In March, the MPC surprised the market when it hiked the rate by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%. At the time, analysts and economists anticipated an end the hike cycle, with only a few expecting one more hike of 25 basis points to follow in May.
However, given the current economic environment, the view has shifted, and it is now more likely to be another 50 basis point hike, the BER said. Worse still, there may be even more rate hikes to follow.
“Although a further worsening of the power situation is undoubtedly bad for growth and in isolation would argue against further domestic policy interest rate hikes, it is also inflationary,” the economists said.
“This is because longer hours without power will increase business operating costs as diesel-powered generators need to run for extended hours and wastage ramps up.”
The BER noted that retailers have already sounded the alarm that any additional costs associated with even more intense power cuts would have to be passed on to the end consumer.
“In that sense, increasingly, the power crisis is a stagflation – lower growth, higher inflation – shock.”
The economists said that the inflationary impact of load-shedding is exacerbated because concerns around the power crisis have arguably been a major contributing factor to the recent rand crash.
Markets have been in a “raw panic” over a possible collapse of South Africa’s grid, despite attempts from the government and power utility Eskom to assure that such an event is not likely. Intellidex analyst Peter Attard Montalto noted that, even if unlikely, the market is demanding proper contingency planning to be in place.
The rand has also been beaten to the ground by allegations that South Africa sold arms to Russia. While these allegations – made by the US ambassador to South Africa – remain unproven, the government has launched an independent investigation into the matter.
Despite its contestations to the contrary, South Africa is widely seen as having taken Russia’s side over the latter’s invasion of Ukraine. The South African government insists it remains neutral – however, Western nations and business leaders are not convinced.
The BER said that, if sustained, the weaker currency will have adverse price impacts.
“Fortunately, in the very near term, the pass-through of the currency sell-off to domestic inflation is muted by subdued, albeit rising last week, international oil prices,” it said.
“Even so, given the SARB’s primary mandate of price stability, we think the upside price risks from more intense load-shedding, the recent stark deterioration in SA’s risk premium, and the associated fall in the value of the rand will push the SARB MPC to hike the repo rate by 50bps on Thursday,” it said.
Before the recent bout of currency weakness, the BER expected an increase of 25bps, signalling the end of the tightening cycle. However, the economists now say that the future of the hike cycle is more murky and indeterminate.
“Even if the MPC moves by 50bps on Thursday, it is now less clear whether that will bring the hikes to an end,” it said.
On top of South Africa’s local woes, the rand and direction of rates are also at the whims of the global economic environment – particularly moves by the US central bank (Fed).
Mixed commentary from Fed policymakers during the past week have added to local uncertainty, the BER said.
“Even after 500bps worth of Fed policy rate hikes over the past year, some members of the Fed’s rate-setting committee (FOMC) doubted whether the US policy rate was sufficiently restrictive to timeously bring inflation back to the Fed’s 2% target.
“Our baseline view remains that the Fed is done hiking, but the conviction is not particularly strong,” the economists said.
More Fed hikes would add to the risk that the SARB also does more after this week and pushes the domestic policy well into restrictive terrain, potentially overdoing the tightening.
“That said, there was some support for our Fed call on Friday when Fed Chair Jerome Powell said tighter lending standards in the US suggest that the Fed may need to do less on the policy interest rate front to achieve its 2% inflation target,” the BER said.
The SARB MPC will announce its rate decision on Thursday, 25 May.
Read: More pain coming for households in South Africa next week
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