Further rate hikes on the table for South Africa

 ·26 Jul 2023

The South African Reserve Bank (SARB) may have paused its interest rate hiking cycle last week, but there could be another hike around the corner.

Last week, the SARB’s Monetary Policy Committee (MPC) narrowly voted – three to two – to keep interest rates unchanged following ten consecutive rate hikes, with the repo and prime rates at 8.25% and 11.75%, respectively.

However, SARB governor Lesetja Kganyago said that more interest rate hikes are on the table, depending on where inflation goes.

Although Consumer Price Inflation (CPI) decreased from 6.3% in May to 5.4% in June – within the SARB’s target range, hawkish sentiment regarding inflation remains within the SARB.

The MPC’s future decisions could also be influenced by what happens to interest rates in the US.

Dr Francois Stofberg from Efficient Wealth said that the US Federal Reserve will likely hike interest rates by 25 basis points when it meets later today, adding that it may hike them again before the end of the year.

Although CPI in the US declined to its lowest level in two years, the core CPI rate, excluding energy and fuel, grew by 4.8%. US policymakers are determined to bring inflation down to the Fed’s 2% target.

CME Group Fedwatch tool says that there is a 98.9% chance that the Fed will increase interest rates by 25 basis points.

Stofberg said that this would likely result in the SARB, which often mirrors what happens in the US, also hiking interest rates.

“Considering this, the SARB will, most likely, feel obligated to increase rates too, even though there is little evidence to support their conviction that higher interest rates in South Africa can attract short-term capital towards SA in this environment,” he said.

“If conditions were different, their plan might have worked but not in the current uncertain global environment.”

It may not

Investec Chief Economist Annabel Bishop said the US will remain committed to tightening policy as it battles inflation.

“Lower US inflation figures, particularly core inflation measures in the US, will reduce the upwards pressure on the US interest rate hike cycle, although the Fed is likely maintaining hawkish communications to contain inflation expectations,” Bishop said.

However, Bishop said that the SARB would likely keep interest rates where they are for the rest of the year, which would end the current rate hiking cycle.

“Looking forward, South Africa’s forward rate agreement (FRA) curve has not factored in an interest rate hike for July – not even a 25bp lift. No hikes are expected for the rest of this year either, tying in with our expectation of no more hikes in the South African interest rate cycle,” she said.

Read: South Africa’s middle class is drowning in debt – and stresses are mounting

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