Interest rate trouble ahead
South African debt holders should anticipate another hike to interest rates this month, as economists and analysts remain divided and the Reserve Bank remains cagey on the path forward.
According to economists at the Bureau for Economic Research (BER), despite a hold on rates in the United States by the Fed, a 25 basis point hike is expected for the USA later this month, signalling that the fight against high levels of inflation is still on.
Elsewhere in the world, central banks have also been continuing a hiking path, with the latest hike coming from Sweden’s central bank, which raised its policy rate by 25bps at the end of last week.
“The bank warned that at least one more hike would be necessary this year. A hawkish tone was notable in other parts of Europe as well,” the BER said.
“At the European Central Bank’s annual conference, the heads of developed-economy central banks warned that interest rates would have to remain high. Although headline inflation in most economies continues to moderate, tight labour markets are pushing up prices and keeping core inflation uncomfortably high,” it said.
Sweden’s move follows similar hikes by the central banks of England, Norway, Switzerland and Turkey.
With global central banks still keeping a tight grip on the cycle, this is likely to feed through to South Africa, which also has its own idiosyncrasies – like load shedding, crumbling infrastructure, blocked ports etc – to deal with.
Last week, SARB governor Lesetja Kganyago indicated as much, with the central bank not giving any indication – one way or the other – on where the next rate hike will go, only to say that the current restrictive levels will stick around for longer.
“The position of the SARB, in line with other central banks, is that the policy rate will have to remain restrictive for longer to bring down inflation,” the BER said.
In an interview with Bloomberg TV on Wednesday, Kganyago said it was too soon to tell whether the bank would pause its rate hiking cycle as the US Federal Reserve (Fed) did in June.
“What is in no doubt is that policy is going to have to remain tight for a little bit longer than actually the market had been pricing,” Kganyago said.
“And the reason has been that inflation has been more persistent than we had actually thought.”
May month inflation slowed more than projected to a 13-month low of 6.3%. Still, inflation has been above the South African Reserve Bank’s target range for a year.
As a result of the uncertainty, local economists are divided, with some seeing a hold on local rates, while others are pencilling in a 25 basis point hike to come.
The SARB has hiked rates in ten consecutive meetings so far, adding 475 basis points in the cycle, starting November 2021.
Following the better-than-expected inflation figures for May, 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 have noted the SARB’s hawkish tone and say the central bank would likely keep rate hikes going for at least one more meeting – likely one more 25 basis point hike in July.
The SARB’s monetary policy committee (MPC) will announce its next rate decision on 20 July.
Read: How much more you’ll pay on your monthly bond if interest rates go up again in July
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