SA Reserve Bank interest rate expectations – experts agree

Experts from the Bureau for Economic Research (BER), Stonehage Fleming, PSG Wealth, Citadel, Momentum Investments and PwC expect the South African Reserve Bank (SARB) to increase the country’s repo rate by 25 basis points (bps) this week.

In January, the MPC raised the repo rate by 25 basis points to 7.25%, defying market expectations for a 50 basis point increase.

The 25 basis point hike in January was the eighth consecutive repo rate increase since the SARB implemented policy normalisation, and South Africa has been on a hiking cycle since November 2021.

Despite the country’s current grim economic outlook, the SARB has remained steadfast in its mission to anchor inflation around the midpoint of the 3% to 6% target band. 

The latest inflation data is unlikely to deter them from this goal.

Inflation unexpectedly rose by 0.1% in February of this year – the first time inflation has increased since October 2022.

The main contributors to this inflation increase were food and non-alcoholic beverages and transport.

The inflation rate now stands at 7%, up from 6.9% in January and far higher than the SARB’s target.

Another consideration is the Federal Reserve’s decision to raise interest rates by 25 basis points, continuing the United States’ hiking cycle.

Given these factors, experts agree that South Africans should expect a further increase in the country’s interest rate. 

Hugo Pienaar, Bureau of Economic Research chief economist

According to the BER’s chief economist, Hugo Pienaar, the SARB will increase the policy interest rate by 25 basis points at the next monetary policy committee (MPC) meeting on 30 March.

Xhanti Payi, PwC senior economist

Xhanti Payi, a senior economist at PwC, said the latest CPI print shows inflation increased in February for the first time in four months, which will be a fact that will worry the SARB. 

Payi expects elevated food prices to remain high until the second half of 2023. Given the Eskom tariff hike, energy prices are also expected to increase.

These two factors mean headline inflation will be elevated for the short term. 

However, in terms of core inflation, the SARB still sees the peak to be ahead. Core inflation is expected to peak at 5.4%, closer to the target band’s upper bound.

The pressure on core inflation comes largely from imported goods, which means the weakening exchange rate is a key concern for inflation. 

He also pointed to the Fed’s hike as a concern for SARB.

“The US Federal Reserve has indicated that they see interest rates continue to move higher to contain their concerningly high inflation. That will be of deep concern to the SARB because it impacts the strength of the US dollar and weakness of the rand.” 

However, he highlighted the biggest concern for the SARB as inflation expectations.

When the public expects inflation to remain high and thus makes decisions on high inflation expectations – including wage demands – it can settle inflation at these high levels for longer. 

Carmen Nel, Matrix Fund Managers economist and macro strategist

Carmen Nel, an economist and macro strategist for Matrix Fund Managers, believes domestic inflation data – which includes sticky headline inflation, rising food price inflation, and elevated inflation expectations – should tip the scale towards a 25 basis point hike in the repo rate.

However, she said the fluid global backdrop – notably the reverberations of the US regional banking crisis and the Credit Suisse debacle – makes it difficult to have a high-conviction view of the upcoming MPC meeting. 

She said that while the confirmed GDP contraction in the fourth quarter of 2022 should give the SARB pause for thought, the focus is still squarely on inflation.

“Importantly, intense load-shedding is proving to be inflationary via supply disruption and higher input costs associated with backup power generation.”

South Africa’s small open economy means that the SARB is, to some extent, a price-taker on global monetary policy. This is why the Fed’s decisions are an important factor in the MPC’s deliberations.

If the Fed had decided to pause, the SARB might have had more scope to become less hawkish. However, since the Fed followed through with a 25bp increase, it should ensure that the SARB delivers what is likely to be the final 25 basis point hike in this cycle.

Jan-Daan van Wyk, Stonehage Fleming senior analyst

Jan-Daan van Wyk, a senior analyst at Stonehage Fleming, noted much has happened since the MPC’s interest rate decision in January.

South Africa has seen a weakening of the trade-weighted rand and higher inflation in February than in January – the latter surprising economists and market participants, who expected both headline and core inflation to continue to roll over.

“Break-even inflation, priced by the market, and surveyed inflation expectations – conducted by the BER – have also turned higher at the latest print,” he said.

“All of these measures, currently, outweigh the South African economic impacts of the regional banking sector turmoil in the US and Switzerland.”

Van Wyk agrees with market pricing and economist expectations for the SARB to hike the repo rate by a further 25 basis points in March, bringing the rate to 7.5%.

Adriaan Pask, PSG Wealth CIO

Adriaan Pask, chief information officer at PSG Wealth, affirmed the SARB’s dedication to driving policy normalisation until inflation anchors around the midpoint of the target range (4.5%).

He said that, given that inflation has moved higher to 7% and based on how the previous MPC meeting went, South Africa should expect a further increase in interest rates.

At the MPC’s meeting in January, three members of the MPC preferred the announced 25 basis point increase, and two members preferred a 50 basis point increase.

“Our view is that the market is pricing in a 25 basis point hike, but that a 50 basis point hike is also quite possible.”

Maarten Ackerman, Citadel chief economist

Citadel chief economist Maarten Ackerman told Daily Investor that, while the repo rate is likely to be increased by another 25 basis points, it may be the end of the current hiking cycle.

“This might be the last one, or we’re getting close to the last in this current hiking cycle.”

However, he warned that continued hikes by the Fed would also see a continuation of South Africa’s hiking cycle.

Sticky inflation may also continue the cycle and mean that South Africans can expect rates to remain high.

Sanisha Packirisamy, Momentum Investments economist

Sanisha Packirisamy, a Momentum Investments economist, looked at local inflation data to reach the 25 basis point increase conclusion.

She said, given broadening pressures in inflation and the upside risks to the inflation outlook, Momentum maintains its view of a 25 basis point increase this week.

However, she noted that “risks for a more hawkish stance are higher in light of renewed global financial stability risks, which could lead to further rand weakness”.

One threat to SARB’s mission of anchoring inflation at the target mid-point is further and more sustained rand weakness, strengthening the argument for a tighter monetary policy stance.

Packirisamy mentioned the inflation data released on Wednesday that indicate a broadening of inflationary pressures. These include:

  • 14 out of the 28 inflation categories are experiencing inflation in excess of 6%, amounting to 58% of the weighted basket. The last time that 58% of the weighted basket experienced inflation in excess of 6% was in May 2009.
  • Rise in services inflation from 4.3% to 4.6% (above the mid-point of the SARB’s target).
  • Rise in median inflation to 5.9% (the highest since October 2016).

However, she said that despite global financial risks that pose a threat to the rand and surveyed inflation expectations, real interest rates are already in meaningfully positive territory.

“The SARB is likely to be cognisant of the growth sacrifice ratio (each subsequent rate increase having less of a dampening effect on inflation and more of a harmful effect on growth). As such, this could limit the extent of interest rate hikes from here.”


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