Another interest rate hike on the cards in South Africa

Economists at Goldman Sachs and Oxford Economics expect policymakers to hike interest rates next month after inflation expectations exceeded the central bank’s 3% target. 

Average inflation expectations two years ahead — the measure the central bank closely watches — rose to 3.9% from 3.6% previously, according to a survey published by the Stellenbosch-based Bureau for Economic Research on Tuesday.

The increase was the first in more than a year.

“The global energy shock, due to the war between the US and Iran, had a negative impact on the inflation expectations of all four social groups,” the BER said.

The data is likely to compel the central bank’s six-member monetary policy committee to adopt a more hawkish stance and continue raising borrowing costs, Goldman Sachs economist Andrew Matheny wrote in a note.

“From a monetary policy perspective, the rise in inflation expectations is unwelcome, and we think solidifies the case for a 25-basis-point rate hike in July — which we expect to be unanimous,” he said.

The MPC, which raised interest rates by 25 basis points to 7% at its last meeting, will deliver their next policy decision on July 23.

Forward-rate agreements are pricing in an 88% chance of a quarter-point hike and another increase by January.

Jee-A van der Linde, senior economist at Oxford Economics, said policymakers need to act. “A failure to act decisively now would risk allowing inflation expectations to become entrenched at a higher level,” he said.

“That risk would intensify if, for example, a strong El Niño were to materialise.” El Niño weather events in southern Africa are associated with hotter and drier conditions that can cause droughts, affecting food price inflation.

The survey was conducted between May 18 and June 4, before the US and Iran agreed on a 60-day ceasefire deal that reopened the Strait of Hormuz, sending global energy costs lower and triggering a steep decline in domestic fuel prices.

That should result in domestic inflation easing in the coming months. 

That could see the MPC hold rates beyond July, followed by the resumption of a cutting cycle in the second quarter of 2027, Matheny said.

Between survey rounds, annual inflation accelerated to 4.5% from 3%, and gasoline prices hit a record. Against that backdrop, all three professional groups surveyed by the BER revised their inflation expectations higher across all forecast horizons, it said. 

Among the three groups, analysts foresee the quickest return to the central bank’s 3% target; they expect inflation to subside to 3.5% by 2028, it said.

Business people and labour unions are slightly more sceptical, anticipating 4% and 4.4% respectively, the BER said.

South African Reserve Bank Governor Lesetja Kganyago recently warned that policymakers would need to act on rising inflation expectations to prevent the impact of the oil shock from fanning broader price pressures.

“We now have inflation expectations, and expectations have drifted away from target,” he told broadcaster CNBC Africa.

“And what we have seen is that all price setters are expecting inflation to be higher, and that is what the central bank has got to act on, reining in those expectations.”