The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) will meet this week to determine the next move for interest rates in the country.<\/p>\n\n\n\n
The central bank will make its announcement on Thursday (20 July) after deliberating on the prevailing economic conditions – with data showing a mixed result.<\/p>\n\n\n\n
The interest rate announcement will be preceded by the latest inflation print for June 2023 on Wednesday, which is expected to show a significant improvement in headline inflation, with economists anticipating a year-on-year move back within the SARB’s target range of 3% to 6%.<\/p>\n\n\n\n
Given the easing of inflation and more positive economic data coming out of the last quarter – against further tightening by central banks globally and ongoing pressures to South Africa’s GDP growth prospects – the SARB’s next interest rate move is expected to be a close call.<\/p>\n\n\n\n
“In a likely close call where a pause is certainly possible, we expect a final repo rate hike of 25bps to 8.50% from the SARB\u2019s MPC on Thursday,” said economists at the Bureau for Economic Research (BER).<\/p>\n\n\n\n
The group noted that even though the economy is performing better, the prevailing conditions still carry a lot of risk, and the SARB is unlikely to become complacent.<\/p>\n\n\n\n
“After taking a breather in June, the (US) Fed is widely expected to hike its policy interest rate by another, and possibly final, 25bps next week. Perhaps more important than possible Fed moves, the MPC will be concerned about a further rise in BER inflation expectations during 2023Q2, as well as the volatile albeit stronger rand,” it said.<\/p>\n\n\n\n
“Finally, although the SARB will most likely present an improved inflation forecast, they may continue to flag upside risks to the outlook.”<\/p>\n\n\n\n
Expectations for another 25bp hike by the SARB are shared by economists at Nedbank, which see the central bank as being hawkish and cautious.<\/p>\n\n\n\n
“Although we still believe that the SARB has done enough to tame inflation and facilitate a sustainable decline towards the target range, we suspect that the MPC will err on the side of caution,” the bank said.<\/p>\n\n\n\n
“In our opinion, the recent rise in inflation expectations, the threat of renewed severe load-shedding, and the rand\u2019s extreme vulnerability against the backdrop of the Fed\u2019s hawkish rhetoric will set the tone for next week\u2019s decision.”<\/p>\n\n\n\n
Nedbank said that it is also possible that the SARB would argue that the damage of pausing too soon is much greater than the cost of over-tightening.<\/p>\n\n\n\n
“Too restrictive policy can easily be reversed, while structurally higher inflation and persistently rising inflation expectations will require even greater economic sacrifices to rectify,” it said.<\/p>\n\n\n\n
If MPC hikes by another 25 bps, monetary policy will become highly restrictive, the bank said, which could push the real repo rate to over 3% in July, climbing to around 3.5% by year-end, well above the SARB\u2019s real neutral rate of around 2.5%. <\/p>\n\n\n\n
“Given that the aggressive tightening over the past two years is already visible in slowing credit demand, rising loan defaults, and stagnant consumer demand, we don\u2019t see the need for any further rate hikes this year. We expect that the easing cycle will start early next year,” it said.<\/p>\n\n\n\n
Not all economists see rates going up further, however.<\/p>\n\n\n\n
Investec chief economist Annabel Bishop believes that the central bank will see the need to pause (hold rates) so that it can assess the impact of the ten rate hikes that have come before since November 2021.<\/p>\n\n\n\n
“With a three to four quarter lag between the impact of interest rates on the economy and inflation, the SARB also needs at least a pause in its interest rate hike cycle to assess the impact on both inflation and the economy,” Bishop said.<\/p>\n\n\n\n
“Already, there is evidence of distress borrowing amongst households, whilst the financial vulnerability of consumers has increased while salary and wage increases are well below inflation in SA, the last in particular having a suppressing effect on consumer demand and so on demand-led inflation.”<\/p>\n\n\n\n
But even if there is no hike this week, Bishop said that there may be another hike in the future.<\/p>\n\n\n\n
“While we expect no hike in interest rates this month for SA, or for the rest of the year, marked rand weakness would change this view, and remains a key risk,” she said.<\/p>\n\n\n\n