What to expect from interest rates in South Africa today
The South African Reserve Bank’s Monetary Policy Committee (MPC) will announce its next policy move on Wednesday, 23 September, at 15h00, with markets widely anticipating a 25-basis-point hike.
This is a shift from where expectations were sitting last month, following the SARB’s surprise move to hold rates in July.
At the time, the war in the Middle East had just reignited after peace talks between the United States and Iran collapsed, sending energy prices soaring.
Many expected the SARB to respond with a rate hike to get ahead of upcoming inflationary pressures.
However, the MPC surprised markets by holding, adopting a wait-and-see stance, as the balance of economic data at the time remained positive. The 6-person committee voted 4-2 to hold, rather than a 25 bp hike.
Going into the September announcement, the picture is very different.
The Iran war has escalated, and global energy supplies remain under pressure. Local fuel prices are set to hit record highs, with global oil prices around $100 a barrel.
South Africa’s economic data has also been dimmer, with unemployment hitting 33.6%, second-quarter GDP declining 0.2%, and inflation expected to tick higher.
Stats SA will also publish inflation data for August on Wednesday, with markets expecting CPI to hit 5%.
In a global context, major central banks have also been hiking rates, with the US Fed hiking by 25 basis points last week. This is also a critical factor that will be considered.
All indicators point to a rate hike coming today, and economists at local and global financial houses have shifted their views to align.
Notably, the expectation was always that another rate hike would be coming—the question was when.
Most forecasts had put a final rate hike for South Africa at the SARB’s last meeting for the year in November. This has now generally been shifted to September.
Some still hold out hope for a hold in September and a hike in November. Others, like Bank of America, anticipate a hike both in September and November.
A coin toss
According to CAM Asset Management Portfolio Manager, Mike van der Westhuizen, the Reserve Bank’s next move is a difficult call, effectively a coin toss.
The group is one of the very few that believes the MPC will hold, but concedes that it’s “another very tight decision”.
“Our base case is that the SARB holds rates steady, but it is effectively a coin toss and will depend on whether the MPC is willing to look through some of the shorter-term inflation dynamics,” Van der Westhuizen said.
“Based on short-term dynamics alone and where the CPI currently sits relative to the 3% target, one could easily argue for a 25-basis-point rate hike.”
Despite this, he believes South Africa’s rate hike will come later, in November.
Van der Westhuizen is the outlier, with Investec, Nedbank, Bank of America, Anchor Capital, and many other financial houses betting on a 25bp hike today.
“The interest-rate differential between South Africa and the United States has narrowed considerably,” Anchor Capital said.
With the SARB repo rate at 7% and the Fed funds rate at 4.25%, the spread has narrowed to 275 bps.
“A narrowing interest-rate differential, combined with a stronger dollar and rising oil prices, increases the risk of sustained rand weakness,” it said. “Against this backdrop, we expect the SARB to raise the repo rate by 25 bpts.”
Investec’s Lara Hodes also flagged the US Fed’s rate hike as a key decider.
“The FOMC opted to hike rates by 25bp [last week] on Wednesday. Accordingly, we are expecting the SARB to hike the repo rate,” she said.
She added that markets are pricing in further monetary tightening, reflecting concerns around higher inflation.
Economists at Nedbank laid out the two sides of the coin.
On the one side, the SARB will consider that there is little evidence of significant second-round effects from the global price shocks.
On the other side, the persistent and rising upside risks to the inflation outlook cannot be ignored, with the war in Iran raging longer than anyone expected and with no end in sight.
“Weighing the case for a hold against the case for a hike, we think the MPC will raise its inflation forecast, stress the mounting upside risks to the outlook and choose to hike interest rates by 25 bps to reinforce policy credibility in the face of a more persistent energy shock,” the group said.
The MPC will deliver its verdict at 15h00.
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