Economists and analysts have had time to digest the latest interest rate hike from the South African Reserve Bank and engage with the central bank over its decision.
The SARB’s Monetary Policy Committee (MPC) unanimously voted to hike rates by 50 basis points last week, taking the repo rate to 8.25% and the prime lending rate to 11.75%.
While the rate hike was not unexpected, market reaction to the move was surprising, sending the rand into a freefall and taking it to its weakest point on record against the US dollar.
According to the Bureau for Economic Research (BER), this reaction appeared to be rooted in the rate hike coming in lower than the market expected, with investors anticipating a 75 basis point hike (versus the 25/50 basis point hike anticipated by analysts).
However, later engagements with the SARB revealed that much of the sell-off was also tied to commentary from the SARB that it anticipates further rand weakness in the coming months.
The BER said that this was an “overreaction” by the market to the commentary, which the SARB later clarified was a risk assessment, not a baseline expectation. The central bank, in fact, expects the rand to strengthen against the dollar in the long run.
“Markets seemed to have overreacted to commentary in the SARB statement accompanying the rate decision that ‘further rand weakness’ was likely.
“In an investor feedback session with the SARB MPC on Friday, it was emphasised that this commentary was meant as a risk statement and not as a baseline expectation that the rand would weaken more,” the BER said.
The BER noted that the MPC often mentions the rand as one of the key upside risks to its inflation forecast. The deterioration in the SARB’s medium-term outlook for the current account may have also added to the downbeat sentiment towards the rand, it said.
“The sharp depreciation of the rand exchange rate in recent weeks and the possible inflationary implications of a weaker currency were bound to be influential in the MPC’s deliberations. As such, the SARB’s forecasts for headline and core CPI in 2023 and 2024 were revised higher.
“Beyond further rand weakness, other upside inflation risks listed by the SARB include higher-than-assumed oil prices, salary increases, and load-shedding-related costs being passed on in the form of higher retail prices.”
All these risk factors will play into the SARB’s decision-making on future rate movements or hold.
This was echoed by economists at Nedbank. The finance group said that with inflation well outside the Reserve Bank’s 4.5% target – and while inflation expectations continue to climb higher – the interest rate outlook still faces upside risks.
“The upside risks flagged by the MPC remained unchanged, still including sticky world inflation, expectations of tighter global oil markets, higher domestic electricity tariffs and other administrative prices, higher wage demands, and elevated domestic food inflation, threatened by rising production costs due to severe load-shedding and the risk of drier weather conditions in the upcoming planting season,” the bank said.
However, while the Reserve Bank believes it has only now entered into restrictive territory with the rates, Nedbank said the environment has been restrictive since January. As such, it does not think the central bank will hike rates again and will hold at the current levels for the rest of the year.
But this comes with some caveats.
“With the rand vulnerable amid mounting negative sentiment towards South Africa, our interest rate forecast still faces significant upside risk,” the bank said.
According to Investec chief economist Annabel Bishop, these risks are well-known to the central bank.
“On the domestic front, the economic environment remains very fragile. The electricity supply situation in the country is dire, with persistent load shedding weighing on all sectors of the economy,
“Indeed, the SARB expects load shedding alone to deduct two percentage points from growth this year,” she said.
“The SARB gauges the risks to the medium-term domestic growth outlook to be balanced; however, it has reiterated that both domestic and global growth prospects remain highly sensitive to new shocks.”
The next interest rate announcement is scheduled for 20 July 2023.