Brace for more interest rate pain

Survey data published in the past week shows that better-than-expected load shedding in June is supporting economic activity for the second quarter of the year.

However, with inflation expectations ticking ever-higher among analysts, businesses and unions, the South African Reserve Bank (SARB) is likely to maintain a hawkish view and deliver another rate hike in July.

According to economists at the Bureau for Economic Research (BER), purchasing managers’ indices (PMIs) published last week show that, while economic activity remained subdued in June, the monthly rate of decline was less severe.

This was off the back of a much better-than-expected power situation, where load shedding was suspended for most of the day (usually between midnight and 16h00) and only needed in the evening peaks.

“However, it is somewhat disappointing that there was not more of a positive output response to reduced power rationing,” it said.

The BER said that this was because of an apparent drop in underlying demand conditions that seems to have counteracted the increased ability to produce as the power constraint eased.

The weakening in demand was broader than just a domestic story, it said.

“This was emphasised by a further decline in the export sales component of the Absa manufacturing PMI.”

While the PMIs showed shorter delivery times – a welcome development at first glance – the BER said that it is unclear to what extent improved lead times were due to soft demand conditions or continued improvements in supply chain operations.

“We think it is most likely a bit of both, with the sustained rise in domestic and international borrowing costs starting to pinch demand. At the same time, Covid-related constraints on supply chains continue to lift.”

Irrespective of the driver, a sustained improvement – a shortening – in delivery times supports a continued easing in local and global price pressures, the BER said.

“The combination of waning demand and moderating inflationary pressures supports our view that the SARB is close to ending the policy interest rate hiking cycle.

“Even so, we expect a final 25bps repo rate increase later this month. This view was supported by the BER’s 2023Q2 inflation expectations survey showing a further moderate rise in average expectations during 2023-25,” it said.

The BER’s latest inflation expectations survey shows that businesses, analysts and unions expect inflation to increase in the second quarter of 2023 – and salaries and wages hikes to be smaller.

Inflation expectations of analysts, business people and trade unions rose by 0.2 percentage points to an average of 6.5% in 2023.

The group’s new inflation expectation survey for the second quarter of 2023 is used by the South African Reserve Bank’s (SARB) Monetary Policy Committee (MPC) as one of the various indicators of interest rate decisions.

An overall view of inflation increasing points to a greater possibility of more interest rate hikes.

Read: Inflation eating away at what little income South Africans have left