Most economists and investment specialists expect another interest rate hike from the South African Reserve Bank (SARB) when its Monetary Policy Committee (MPC) meets next month.<\/p>\n
Last month, the SARB surprised the market when it hiked the rate by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%.<\/p>\n
Before this increase, many experts believed the SARB\u2019s hiking cycle would end soon, as the March hike marked the ninth consecutive interest rate increase since November 2021.<\/p>\n
However, the SARB has remained steadfast in its mission to bring inflation within its target range of 3% to 6% and anchor expectations around the mid-point of this range (4.5%).<\/p>\n
Recent consumer price inflation (CPI) data for March showed this goal slipping away, as CPI accelerated to 7.1% and food inflation reached a 14-year\u00a0high.<\/p>\n
Experts are, therefore, slightly less hopeful of a reprieve in their expectations for the May monetary policy committee (MPC) meeting. Many predict a continuation of the hiking cycle and little relief in the rest of 2023.<\/p>\n
Daily Investor asked nine experts about their interest rate expectations for May, and most predicted a 25 basis point hike.<\/p>\n
Jeff Schultz \u2013 BNP Paribas South Africa senior economist<\/strong><\/p>\n \u201cFollowing the SARB\u2019s more hawkish 50 basis point hike in March, we think that a terminal rate of 8.00% reached as early as next month remains very plausible,\u201d said Jeff Shultz, BNP Paribas South Africa senior economist.<\/p>\n However, he said a lot depends on the data and exogenous environment.<\/p>\n The MPC has repeatedly stressed the importance of nipping rising inflation expectations in the bud. Therefore, the March CPI data is \u201cunlikely to help matters\u201d.<\/p>\n Shultz expects inflation to remain sticky and well above the SARB\u2019s target range in March and April. He, therefore, thinks it will be difficult for the SARB to pause its hiking cycle as early as the MPC\u2019s May meeting.<\/p>\n \u201cWe also think that the bank is concerned over growing uncertainties in the exogenous environment (global banking sector and tightening financial conditions), which it worries could \u2018raise the risk profile of emerging markets\u2019, capital outflows and weaker currency performance.\u201d<\/p>\n He said relief in the form of rate cuts is only likely from Q1 2024. He expects 100 basis points in cumulative cuts (25 basis points per meeting) starting from March 2024.<\/p>\n Hugo Pienaar \u2013 Bureau for Economic Research chief economist\u00a0<\/strong><\/p>\n Bureau for Economic Research chief economist Hugo Pienaar expects the MPC to hike the repo rate by another 25 basis points in May.<\/p>\n Dawie Roodt \u2013 Efficient Group chief economist <\/strong><\/p>\n Efficient Group chief economist Dawie Roodt said the March CPI data came as \u201ca real shocker\u201d. He expected CPI to fall to 6.7%, but it increased to 7.1%.<\/p>\n Roodt said he is particularly concerned about the sharp increase in food prices which fueled higher inflation in March.<\/p>\n \u201cBefore the last CPI print, I thought the SARB would halt their tightening cycle \u2013 keep rates on hold \u2013 but now I think they will increase again,\u201d he said.<\/p>\n However, Roodt noted that while monetary policy is moderately restrictive as it dampens demand, fiscal policy is highly expansionary. This means the Finance Minister and the SARB are \u201cpulling in opposite directions\u201d.<\/p>\n Mamello Matikinca-Ngwenya \u2013 FNB chief economist<\/strong><\/p>\n FNB chief economist Mamello Matikinca-Ngwenya said she expects the SARB MPC to hold and keep the repo and prime lending rates unchanged.<\/p>\n \u201cFollowing a cumulative 425 basis points of hikes in the current cycle, the SARB should now take time to assess the impact on demand and inflation,\u201d she said.<\/p>\n \u201cRisks are tilted upwards, and there is a likelihood that the MPC applies further monetary tightening, determined to rein in sticky inflation (especially if our external vulnerability worsens and the rand weakens further) and inflation expectations that are higher than the SARB\u2019s preferred anchor of 4.5%.\u201d<\/p>\n Xhanti Payi \u2013 PwC South Africa senior economist<\/strong><\/p>\n PwC senior economist Xhanti Payi gave five reasons why he expects the SARB to raise interest rates by another 25 basis points.<\/p>\n The first reason relates to headline inflation, which remains stubbornly above the SARB\u2019s target range. He said the March inflation data would have concerned the reserve bank.<\/p>\n Payi said inflation is also likely to stay high, as pressure on the upside is still there, given elevated oil prices after some oil-producing countries decided to cut production.<\/p>\n The second reason relates to core inflation, which remains \u201cuncomfortably high\u201d at 5.2% year-on-year in March.<\/p>\n This is above the midpoint of the SARB\u2019s target range. The reserve bank has also expressed concern about this level of core inflation, he said.<\/p>\n The third reason why Payi expects a 25 basis point increase, rather than another hawkish 50 basis points, is because the SARB has limited scope for increases as high as the March hike.<\/p>\n \u201cThis is due to the range of negative economic data we have seen for February 2023: Manufacturing production -5,2 year-on-year and -1.3 month-on-month; retail sales -0.5% year-on-year and -0.1 month-on-month; motor sales -1.5 year-on-year; and wholesale trade sales -1.9% year-on-year.\u201d<\/p>\n Fourthly, the SARB started this hiking cycle as \u201cnormalising\u201d interest rates. However, the country is now markedly above the last cycle of hikes.<\/p>\n Lastly, the SARB remains steadfast in its mission to anchor inflation expectations.<\/p>\n \u201cAnd, thus, they will be motivated to hike again.\u201d<\/p>\n Maarten Ackerman \u2013 Citadel chief economist<\/strong><\/p>\n Citadel chief economist Maarten Ackerman said the SARB\u2019s March interest rate hike was motivated by higher-than-expected inflation data and the expectation that inflation will continue rising.<\/p>\n The latest CPI data confirmed this expectation, and, combined with the weakening rand, he expects the inflation pressure to remain for some time longer.<\/p>\n Ackerman said there is, therefore, a strong case for another hike come May, though maybe not one as aggressive as the 50 basis points hike in March.<\/p>\n Lourens Pretorius \u2013 Matrix Fund Managers fixed income portfolio manager<\/strong><\/p>\n Matrix Fund Managers fixed income portfolio manager Lourens Pretorius said the SARB\u2019s aggressive rate hike in March leaves monetary policy at arguably restrictive levels compared to the reserve bank\u2019s Quarterly Projection Model.<\/p>\n Given the likely forward-looking inflation profile, this model suggests a 7.0% to 7.25% policy setting.<\/p>\n With its March hike, the SARB showed that its focus is on inflation rather than growth, as it reduced the economy\u2019s potential growth to a mere 0.1% for 2023.<\/p>\n It, therefore, left little room for capacity constraints in the economy, being inflationary of nature.<\/p>\n The recent March headline inflation reading has also surprised marginally to the upside at 7.1%, with a broadening of inflation pressures evident and food inflation (14.6%) being a dominant driver.<\/p>\n Pretorius said he expects inflation will benefit from strong base effect unwinds following the anniversary of the Russia-Ukraine war. However, he also expects the SARB to be weary of the risks associated with this outlook.<\/p>\n This weariness is particularly motivated by the swing in the current account from surplus to deficit for the first time in three years and the effect this will have on the rand.<\/p>\n \u201cWe think the SARB is likely to increase the repo rate by a further 25 basis points to 8.0% in May and halt the current tightening cycle until there is sufficient evidence that inflation, as well as longer-term inflation expectations, move closer to the mid-range of the inflation target (4.5%).\u201d<\/p>\n Pretorius also expects some mild accommodation back to 7.0% once the re-anchoring of inflation is achieved.<\/p>\n Arthur Kamp \u2013 Sanlam Investments chief economist<\/strong><\/p>\n Chief economist at Sanlam Investments Arthur Kamp said the SARB\u2019s MPC is concerned about high inflation expectations, tight global financial conditions, and the risk of the rand weakening against the backdrop of US monetary policy tightening.<\/p>\n These concerns were also top of mind at the March meeting, where an aggressive 50 basis point hike was announced.<\/p>\n Kamp said the rand\u2019s sustained weakness presents an inflation risk, and the US Federal Open Market Committee meeting in early May 2023 is, therefore, a key event to monitor.<\/p>\n South Africa\u2019s current account deficit also places pressure on the rand, which creates a dilemma for the SARB, which needs to decide between curbing inflation or providing relief to an ailing economy.<\/p>\n However, Kamp specified that the SARB did not cause South Africa\u2019s growth problem. Instead, the problem reflects failing infrastructure, too much government involvement in economic activity, policy uncertainty, and low business confidence.<\/p>\n He said the best solution is for South Africa\u2019s economic reform momentum to gain traction to lift the potential economic growth rate, attract foreign capital inflows to fund investment and alleviate the pressure on the balance of payments and the rand.<\/p>\n However, if this solution fails, the SARB must tighten macroeconomic policy.<\/p>\n Provided there have been no material changes to the SARB\u2019s inflation outlook since March, the MPC is likely to at least discuss the merits of a pause in the interest rate hiking cycle, he said.<\/p>\n However, given the rand\u2019s vulnerability and other contributing factors, another interest rate hike seems likely.<\/p>\n Adriaan Pask \u2013 PSG Wealth chief investment officer<\/strong><\/p>\n PSG Wealth chief investment officer Adriaan Pask said the MPC revealed its priority at the March meeting \u2013 guiding inflation back towards the mid-point of the target band.<\/p>\n The MPC is focused on bringing down inflation to reduce the economic costs of high inflation and enable lower interest rates in the future.<\/p>\n \u201cIt, therefore, seems that they are still prioritising combating inflation over near-term growth challenges. Given that inflation numbers are still surprising to the upside, our expectation is that rates will be increased by 25 basis points,\u201d he said.<\/p>\n By Bianke Neethling. This article was first published by Daily Investor and republished with permission. Read the original here<\/a><\/strong>.<\/em><\/p>\n\n
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