Warning over interest rate hikes for South Africa

 ·12 Jul 2023

Efficient Group economist Dr Francois Stofberg says that the tighter global economy will likely result in more interest rate hikes for South Africa – though the central bank (SARB) is unlikely to exceed 50 more basis points this year.

In a note this week, Stofberg said that a strong June jobs report in the United States (US) would likely leave the Federal Reserve (Fed) on course to raise interest rates to a 22-year high during their next meeting to cool off the economy and combat inflation.

“As the outlook for above-target inflation and a stronger-than-expected (US) labour market persists, more restrictive monetary policy will be needed for a longer period. Consequently, many emerging markets and their currencies took a bit of a beating,” he said.

Locally, the South African equity market contracted 2.4% when the news broke, and the rand depreciated more than 2% to levels above R19.10 against the US dollar. While the market has eased since then – with the rand back to around R18.40 to the dollar – markets remain in flux.

“Tighter monetary policy in the US will likely translate into more interest rate hikes in South Africa too,” Stofberg noted.

“The South African Reserve Bank has unequivocally shown that their primary concern is inflation and that they care very little for consumers or the broader economy. Although, we doubt that the SARB will need to raise interest rates by more than an additional 0.5% (50bp) in 2023.”

Nedbank economist Johannes Khosa also believes that more rate hikes are coming, with the group pencilling in one more 25 basis point hike, likely at the July meeting.

The Reserve Bank’s Monetary Policy Committee (MPC) hiked interest rates by another 50 basis points in May, taking the repo and prime rates to 8.25% and 11.75%, respectively.

“The aggressive stance was motivated mainly by the poor inflation outlook and elevated inflation expectations,” he said.

Since then, inflation expectations have continued to rise, with the latest survey from the Bureau for Economic Research (BER) pointing to raised expectations from businesses, analysts and unions.

Nedbank noted that the SARB has continued to see upside risks to inflation emanating from sticky world inflation, expectations of tighter global oil markets and a vulnerable rand.

“Given volatile global risk sentiment amid fading world growth and the threat of further US rate hikes, the risk of another bout of severe rand weakness remains high,” Khosa said.

“Other risks include higher domestic electricity tariffs and other administrative prices.”

The outlook for domestic food inflation also remains uncertain, threatened by rising production costs due to severe load-shedding and the risk of drier weather conditions in the upcoming planting season as concerns.

“Elevated living costs could also fuel another round of higher wage settlements despite lower labour productivity,” he said.

Nedbank noted that, while May’s better-than-expected inflation outcomes are encouraging, suggesting that inflation could return to the SARB’s target range earlier than expected, the MPC is likely to remain cautious.

“Consequently, the SARB is forecast to hike rates one more time by 25 bps in July, taking the repo rate and prime lending rate to peaks of 8.5% and 12%, respectively,” Khosa said.

According to Nedbank’s projections, monetary easing can be expected only in early 2024, with the MPC cutting rates by 100 bps by the end of the year.

Read: Brace for more interest rate pain

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