Reserve Bank interest rate hike on the cards

South Africa’s Reserve Bank is widely expected to raise interest rates to defend its 3% inflation target amid persistently high energy prices, even as domestic growth sags.

Nineteen of 22 economists surveyed by Bloomberg see the South African Reserve Bank hiking by 25 basis points to 7.25% at the conclusion of its monetary policy committee meeting after 3 p.m. in Pretoria on Wednesday.

Economists also predicted the six-member MPC would split over the decision, with the median estimate showing four backing a hike and two preferring to hold.

That would be the second rate increase this year, following a move in May, as the SARB joins other central banks, including the Federal Reserve and European Central Bank, in responding to the inflationary shock caused by the conflict in the Middle East.

“We now see additional pressure on the SARB to tighten policy by 25 basis points in September to safeguard its anti-inflation credibility,” Razia Khan, head of research, Africa and Middle East at Standard Chartered Bank, wrote in a client note.

She cautioned that it might be a tight call after the South African economy shrank 0.2% in the second quarter, while adding that the Fed’s quarter-point hike last week could strengthen the case for a SARB move.

The rand has averaged around 16.28 per dollar so far in the third quarter, compared with a starting point of 16.39/dollar over the period assumed by the MPC in July.

But a significant widening in interest-rate differentials between South Africa and the currencies of the US, eurozone and other trading partners could hurt the unit and make imports more expensive.

The SARB targets 3% inflation with a 1-percentage-point tolerance band on either side.

Kganyago and his colleagues have repeatedly stressed their commitment to guiding price pressures back toward that goal, which they adopted last year.

It replaced a much more lenient 3%-6% band that officials had pursued since 2000.

While the nation’s annual inflation rate eased to 4.3% in July from 5% the month before, it is expected to edge back up to 4.5% in August data due to be published on Wednesday morning, according to the median estimate of economists polled by Bloomberg.

A recent climb in energy prices could add to upward pressure going forward.

“Given the developments in global oil prices, the level that they are hovering and following last week’s Fed decision,” a 25 basis point rate hike is more likely than not, said Jee-A Van Der Linde, a senior economist at Oxford Economics.

With Brent crude back trading near $100 per barrel — versus the $78.50 assumed by the MPC in July — South African motorists are bracing for another sharp increase in the cost of gasoline and diesel at the start of next month, putting another dent in household budgets.

“Recent oil price movements have already pushed local petrol prices up by an average of R1.34 per litre or 5.3% month-on-month in September,” Nedbank economists who are anticipating a 25 basis point hike said in a research note.