Interest rate hike expected from SA Reserve Bank

Lesetja Kganyago

The South African Reserve Bank (SARB) is expected to increase interest rates by 25 basis points this month as it nears the end of the interest-rate hiking cycle.

South Africa is not alone. Central banks across Africa’s biggest economies are poised to do the same to contain sticky inflation.

It is also aimed at deterring a selloff in their assets exacerbated by the collapse of US lender Silicon Valley Bank and stress at Credit Suisse.

Nigeria, Egypt, Morocco, and Kenya are projected to raise borrowing costs in the next two weeks.

Monetary authorities in nations such as Ghana and Angola, where inflation is on a downswing, are predicted to hold.

Six smaller African economies will stake out different approaches to bring prices under control and deal with the contagion caused by the global banking crisis.

A gauge for government dollar bonds in Africa has dropped every day for the past seven, pushing the yield on the average security on the continent up 164 basis points to 14.36%. That’s the highest level since 3 November. All the bonds in the index are rated junk.

While investors have rushed to the safety of bonds in general amid the crisis, they have favoured quality credit and sold sub-investment grade securities.

The Federal Reserve’s rate path will also be key in decision-making. An expected slowdown in monetary tightening in the US because of the banking turmoil could weaken demand for the greenback.

It would cut developing nations’ cost of servicing their dollar-denominated debt, make their imports less costly and help them draw more international investment.

South African Reserve Bank expectations

Momentum Investments economist Sanisha Packirisamy

The SARB’s fight against inflation is unlikely to be derailed by weakness in the global banking system.

South Africa’s inflation in January was 6.9%, above the target range of 3% to 6%. Average inflation expectations for the year stand at 6.3%, also above the central bank’s 4.5% target.

Momentum Investments economist Sanisha Packirisamy said policymakers would likely raise the benchmark by 25 basis points to address potential risks to the inflation outlook.

They include the knock-on effects of a weaker currency, with the rand having weakened about 7% against the dollar this year.

While traders have pared bets for a quarter-point increase, that’s largely in line with expectations of less tightening by the Fed after the collapse of SVB.

South Africa’s MPC may take direction from the European Central Bank, which delivered a 50 basis-point hike last week.

The ECB “made a loud statement to markets to suggest that fighting inflation is their top priority, but they stand ready to support the financial sector if needed through financial stability tools”, Packirisamy said.

Standard Bank is optimistic that South Africa will be within this target come year-end and anticipates interest rates to increase by an additional 25 basis points in the first half of 2023.

Nedbank, in its recent results, shared this sentiment.

A 25 basis point increase would take the repo rate to 7.5% and the prime lending rate to 11% by the end of the year.

Nedbank also expects inflation to reduce from 2022 levels and average 5.5% in 2023, which would put inflation squarely within the target band.

Reserve Bank deputy governor Rashad Cassim comments

Rashad Cassim
South African Reserve Bank deputy governor Rashad Cassim

SARB deputy governor Rashad Cassim said they estimate that the country’s neutral rate is 7%.

The neutral rate is the interest rate that neither speeds up nor slows down the economy. It is the level at which the policy rate will settle when inflation is at target, and output is at potential.

He said the neutral rate is a concept many of the Reserve Bank’s close watchers have questions about.

“In South Africa, we estimate this neutral rate to be 7% over time, of which 4.5% is compensation for inflation and 2.5% is the so-called neutral real interest rate,” he said.

The neutral real interest rate of 2.5% is the neutral rate excluding inflation. The 2.5% is made up of 0.5%, which reflects the global real rate derived from the longer-run real policy rate of the US, Europe, and Japan, plus 2% for the South African risk premium.

“As with potential growth, we cannot be sure that the neutral rate is exactly 7%. It is an unobservable concept, and our tools for measuring it are imperfect,” Cassim said.

“Nonetheless, a rate of around 7% is a reasonable place to start conversations about the policy stance.”

It suggests that current rates, at 7.25%, are in the region of the neutral rate, and it also illustrates how loose policy was back when we were at 3.5%.

“Of course, if the inflation-adjusted rate needs to be around 2.5%, then, for policy to be neutral, we need inflation to be around 4.5%,” he said.

The Reserve Bank deputy governor said the country is not there yet as inflation is still close to 7%.

“For this reason, the extent to which the policy rate will change from the current 7.25% will depend on whether we feel confident that disinflation is proceeding and we will get to 4.5% this year.”

Reporting with Bloomberg


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