The South African Reserve Bank (SARB) is expected to increase the country’s interest rate this week (25 May).
The most recent interest rate hike saw the Monetary Policy Committee surprising markets with a 50 basis point hike as domestic woes, including load shedding, continued to drive food and fuel inflation.
Professor Andre Roux, an economist at the Stellenbosch Business School, said that recent events have strengthened the argument for another hike this week – likely also at 50 basis points.
The professor said that given the central bank’s mandate of keeping inflation between the target range of between 3% and 6%, they have no choice but to announce a further increase on Thursday.
“Until a few days ago, many would have hoped that a 25-basis point increase would have sufficed – especially in light of the torpid economic growth performance, the persistently high unemployment rate, the decline in retail sales, and the seemingly never-ending misery brought about by pervasive load-shedding,” Roux said.
“Unfortunately, the recent exchange rate turmoil has seemingly raised the chances of a 50-basis point increase.”
He said that a 50 basis point increase would unlikely result in a strengthening of the local currency; it could, however – all things being equal – help to stem a swift and vicious further weakening.
Despite this, he noted that a 25 basis point increase would be a more reasonable path at this stage – especially if the effect on the exchange rate of the alleged Russian arms transaction turns out to be short-lived.
On 12 May, the South African rand tanked to its then lowest point to the dollar at R19.47. This came on the back of the US embassy accusing the country of arming Russia, as well as investor fears over the possibility of a grid collapse. The rand has since hit a new record low at R19.52.
Roux said that further rate hikes in the USA and Europe suggest that the war against inflation is not over yet.
In the context of South Africa, he said, the revelation that the government’s primary budget surplus that was hoped for was not going to become a reality suggests more fiscally-induced inflationary pressures.
Recent consumer price inflation (CPI) data for March showed that CPI accelerated to 7.1%, and food inflation reached a 14-year high.
He said that this is also compounded by the announcement that civil servant wage increases will be higher than budgeted.
“Minimum wages are set to increase at a rate in excess of the headline inflation rate, which means that the unit costs of labour will rise at a faster rate than labour productivity increases.”
“This will fuel inflation through the supply side of the economy. And if all of this was not enough, the effect on the already beleaguered exchange rate of the rand of the speculation regarding an ‘arms deal’ with Russia has added insult to injury,” said Roux.
When contemplating the end of this long-winded rate hike cycle, Roux added that in the absence of any new major inflationary forces, this month’s increase might be the last for a while, with the next adjustment – a downward one – being sometime during the first quarter of next year.
One of South Africa’s major banks, Nedbank, expects a 25 basis point hike, which will likely be the last in the rate cycle that started as far back as November 2021.
In its latest Economic Insights report, it said that the MPC would possibly present a hawkish statement, mainly expressing concern about the poor inflation outlook due to the weaker rand and sticky food prices, which appears to reflect the adverse impact of load-shedding on production costs.
“The MPC will also be alarmed by the acceleration in core and services inflation, which suggests broadening price pressures,” said Nedbank.
Economists at the Bureau for Economic Research are of the view that a 50 basis point hike is coming, cautioning that future hikes are not out of the question as the path forward remains murky.
Speaking as a part of the property sector, John Jack, the CEO of Galetti Corporate Real Estate, said that this interest rate hike will come in quick succession to the previous, adding to the difficulty faced by landlords and property owners.
Jack said that his company is expecting a 25 basis point increase, which will take the interest and repo rate up to 8% and 11.50%, respectively.