South Africa bracing for interest rate hikes
South Africa’s central bank is set to raise borrowing costs for the first time in three years as policymakers seek to combat inflationary pressures stemming from the Iran war, including sharply higher oil prices.
All but one of 19 economists surveyed by Bloomberg forecast Governor Lesetja Kganyago and the five other members of the monetary policy committee to lift the benchmark interest rate by 25 basis points to 7% on Thursday.
The decision, due shortly after 15h00 in Pretoria, is expected to be split.
Traders are also pricing in a quarter-point increase on Thursday and at least one additional hike by year-end.
An increase would see South Africa join a handful of central banks, including those in Indonesia and Mauritius, in raising interest rates while most policymakers stand pat to assess the war’s impact on inflation.
With only fuel prices affected so far, no clear evidence yet of second-round effects from the Middle East oil shock, and food inflation remaining subdued, the decision is likely to be a close call.
Andrew Matheny, an economist at Goldman Sachs Group Inc., expects policymakers to raise the benchmark rate by 25 basis points.
“We expect that the policy statement will be accompanied by alternative scenarios that signal the South African Reserve Bank’s readiness to tighten policy more aggressively in the event of a larger shock and, or deterioration in inflation expectations,” he said.
Fighting erupted in Iran on 28 February and disrupted traffic through the Strait of Hormuz, normally a key shipping route for about a fifth of the world’s seaborne oil and liquefied natural gas, which sent energy costs soaring.
Gasoline prices in Africa’s largest economy were raised to a near four-year high this month, and the authorities have cut levies to cushion motorists against the impact.
Even so, South Africa’s inflation rate climbed to 4% in April from 3.1% in March, its highest level in 20 months.
The central bank targets inflation at 3%, with a tolerance band of one percentage point on either side.
Petrol prices are set to hit a record next month as the government unwinds some of the temporary relief measures introduced after the conflict began.
The central bank is also likely to raise its inflation forecast, which was previously projected to average 3.7% this year.
This will reflect a higher-for-longer oil price outlook and the prospect of a more protracted war, said Keabetswe Mojapelo, a macroeconomist at Rand Merchant Bank.
He also expects a 25 basis-point rate increase and sees a larger hike as unlikely. “The committee will want to look through the initial shock,” he said.
Policymakers would probably want to see firmer evidence of second-round effects extending beyond transport costs and becoming more broad-based across the inflation basket, he added.
One economist expects a hold
Cartesian Capital Ltd. takes a contrarian view, predicting the central bank will keep rates unchanged.
The higher inflation rate, now at the upper end of the central bank’s target range, has been driven by exogenous factors that it cannot directly manage, Anthea Gardner, managing partner at Cartesian, said.
“The SARB playbook for supply shocks, historically, has been to look through the first-round impact, watch closely for second-round effects,” she said.
“We haven’t seen [these] come through yet.”
Gardner said the SARB will likely avoid making urgent policy changes before there is clear evidence that inflation will, in fact, remain persistently higher.
There are other factors narrowing the chance of a rate hike.
They include improvements in South Africa’s fiscal position, a currency that has remained relatively stable despite the war, and contained imported inflation, said Tertia Jacobs, a treasury economist at Investec.
The shock also “hasn’t spilled over into higher sovereign risk,” she said, citing Moody’s Ratings decision to lift South Africa’s credit outlook to positive from stable.
By Ntando Thukwana for Bloomberg
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