Dark turn for interest rates

 ·26 Jun 2023

After spurring some hope in the markets last week that interest rate hike cycles were nearing an end, central banks continued to hike rates – which will factor into local decisions by the South African Reserve Bank (SARB) as well.

Last week saw a spate of surprising rate hike decisions by international central banks, adding pressure to local markets.

Following a higher-than-expected consumer price inflation (CPI) print in the UK, the Bank of England surprised markets by hiking its key lending rate by a bigger-than-expected 50bps, taking the rate to 5%, a level not seen since April 2008.

According to the Bureau for Economic Research, while the BoE did not explicitly signal further increases, it equally did not point to ending the cycle following this hike.

“For now, further hikes are very likely with swap markets now implying another 125bps in hikes, which would take the policy interest rate to 6.25% – the highest level since 1998,” the BER said.

The BER said another hawkish surprise on the monetary policy front was Norway’s central bank hiking by 50bps, instead of 25bps as broadly expected.

The Swiss National Bank also hiked its policy rate by 25bps and signalled more increases could be expected.

Adding to the mix of rate hikes, in testimony to Congress, US Federal Reserve Chair Jerome Powell reiterated the Fed’s commitment to bring back inflation to its 2% target, saying more rate hikes are “likely” this year.

“All this suggests that we have yet to see the end of the advanced economy hiking cycle,” the BER said.

In emerging markets, the Turkish central bank hiked its interest rate to 15% last week – but the 650bps increase was lower than the general market expectation – and the People’s Bank of China cut two key lending rates to stimulate growth in the world’s second-largest economy.

South Africa impact

The mix of directions for global interest rate cycles is one of the key factors the SARB’s Monetary Policy Committee considers when determining local rates.

The SARB has hiked rates in ten consecutive meetings so far, adding 475 basis points in the cycle, starting November 2021.

Following better-than-expected inflation figures from Stats SA last week – when CPI cooled to 6.3% from 6.8% before – analysts felt more confident that the Reserve Bank would pause interest rate hikes at its next meeting in July.

However, not everyone is as optimistic. Economists at Nedbank said that the SARB has been very hawkish and would likely keep rate hikes going for at least one more meeting. The group anticipates a 25 basis point hike in July.

With global central banks still keeping a tight grip on the cycle, this may feed through to South Africa, which has its own idiosyncrasies – like load shedding, crumbling infrastructure, blocked ports etc – to deal with.

More tellingly, the tighter cycle has an adverse effect on the rand/dollar exchange rate.

Following three weeks of a strengthening rand, the local currency closed Friday at an almost two-week low against the dollar and also lost ground against the euro and pound.

According to TreasuryOne, the hawkishness of central banks is driving risk aversion in markets, which has raised concerns for the global growth outlook and pushed investors back to the safety of the dollar.

Read: The countries where South Africans can buy citizenship – and how much it costs

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