Rising inflation may push interest rates higher

Lesetja Kganyago

Traders raised bets that South Africa’s central bank will continue its interest-rate hiking cycle next month after inflation unexpectedly quickened in March. 

Forward-rate agreements starting in two months, used to speculate on borrowing costs, show traders are fully pricing in a quarter-point increase in the repo rate, with a chance of a bigger 50-basis point move on May 25, when the monetary policy committee gives its next decision.

That’s after statistics office data showed the annual inflation rate quickened to 7.1% from 7% a month earlier. The outcome exceeded all estimates of the 13 economists in a Bloomberg survey.  

The South African Reserve Bank prefers to anchor price-growth expectations close to the 4.5% midpoint of its target range.

A survey published before its March rate decision showed analysts, labour groups and households expect inflation to average 6.3% this year.

That suggests policymakers nearing the end of the interest-rate hiking cycle may still be reluctant to pivot away from tightening at next month’s rate-setting meeting.  

The central bank has delivered 425 basis points of tightening since November 2021, with March’s bigger-than-expected 50 basis point move surprising financial markets.

The MPC believes it has taken the right decisions to guide price growth back to the midpoint of its target range “but this cannot preclude further steps if inflation and inflation expectations continue to surprise higher”, Governor Lesetja Kganyago said in a speech this month.  

Price growth in Africa’s most industrialized economy is being stoked by currency weakness, severe power rationing and logistics network constraints that are adding to the costs of doing business and sapping the country’s economic growth prospects. 


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