Another SA Reserve Bank interest rate hike on the cards

Most economists and investment specialists expect another interest rate hike from the South African Reserve Bank (SARB) when its Monetary Policy Committee (MPC) meets next month.

Last month, the SARB surprised the market when it hiked the rate by 50 basis points, increasing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%.

Before this increase, many experts believed the SARB’s hiking cycle would end soon, as the March hike marked the ninth consecutive interest rate increase since November 2021.

However, the SARB has remained steadfast in its mission to bring inflation within its target range of 3% to 6% and anchor expectations around the mid-point of this range (4.5%).

Recent consumer price inflation (CPI) data for March showed this goal slipping away, as CPI accelerated to 7.1% and food inflation reached a 14-year high.

Experts are, therefore, slightly less hopeful of a reprieve in their expectations for the May monetary policy committee (MPC) meeting. Many predict a continuation of the hiking cycle and little relief in the rest of 2023.

Daily Investor asked nine experts about their interest rate expectations for May, and most predicted a 25 basis point hike.

Jeff Schultz – BNP Paribas South Africa senior economist

“Following the SARB’s more hawkish 50 basis point hike in March, we think that a terminal rate of 8.00% reached as early as next month remains very plausible,” said Jeff Shultz, BNP Paribas South Africa senior economist.

However, he said a lot depends on the data and exogenous environment. 

The MPC has repeatedly stressed the importance of nipping rising inflation expectations in the bud. Therefore, the March CPI data is “unlikely to help matters”.

Shultz expects inflation to remain sticky and well above the SARB’s target range in March and April. He, therefore, thinks it will be difficult for the SARB to pause its hiking cycle as early as the MPC’s May meeting. 

“We also think that the bank is concerned over growing uncertainties in the exogenous environment (global banking sector and tightening financial conditions), which it worries could ‘raise the risk profile of emerging markets’, capital outflows and weaker currency performance.”

He said relief in the form of rate cuts is only likely from Q1 2024. He expects 100 basis points in cumulative cuts (25 basis points per meeting) starting from March 2024.

  • Prediction: 25 basis point increase

Hugo Pienaar – Bureau for Economic Research chief economist 

Hugo Pienaar

Bureau for Economic Research chief economist Hugo Pienaar expects the MPC to hike the repo rate by another 25 basis points in May.

  • Prediction: 25 basis point increase

Dawie Roodt – Efficient Group chief economist 

Dawie Roodt

Efficient Group chief economist Dawie Roodt said the March CPI data came as “a real shocker”. He expected CPI to fall to 6.7%, but it increased to 7.1%. 

Roodt said he is particularly concerned about the sharp increase in food prices which fueled higher inflation in March.

“Before the last CPI print, I thought the SARB would halt their tightening cycle – keep rates on hold – but now I think they will increase again,” he said. 

However, Roodt noted that while monetary policy is moderately restrictive as it dampens demand, fiscal policy is highly expansionary. This means the Finance Minister and the SARB are “pulling in opposite directions”.

  • Prediction: 25 basis point increase

Mamello Matikinca-Ngwenya – FNB chief economist

FNB chief economist Mamello Matikinca-Ngwenya said she expects the SARB MPC to hold and keep the repo and prime lending rates unchanged. 

“Following a cumulative 425 basis points of hikes in the current cycle, the SARB should now take time to assess the impact on demand and inflation,” she said.

“Risks are tilted upwards, and there is a likelihood that the MPC applies further monetary tightening, determined to rein in sticky inflation (especially if our external vulnerability worsens and the rand weakens further) and inflation expectations that are higher than the SARB’s preferred anchor of 4.5%.”

  • Prediction: no change

Xhanti Payi – PwC South Africa senior economist

PwC senior economist Xhanti Payi gave five reasons why he expects the SARB to raise interest rates by another 25 basis points.

The first reason relates to headline inflation, which remains stubbornly above the SARB’s target range. He said the March inflation data would have concerned the reserve bank.

Payi said inflation is also likely to stay high, as pressure on the upside is still there, given elevated oil prices after some oil-producing countries decided to cut production.

The second reason relates to core inflation, which remains “uncomfortably high” at 5.2% year-on-year in March. 

This is above the midpoint of the SARB’s target range. The reserve bank has also expressed concern about this level of core inflation, he said.

The third reason why Payi expects a 25 basis point increase, rather than another hawkish 50 basis points, is because the SARB has limited scope for increases as high as the March hike.

“This is due to the range of negative economic data we have seen for February 2023: Manufacturing production -5,2 year-on-year and -1.3 month-on-month; retail sales -0.5% year-on-year and -0.1 month-on-month; motor sales -1.5 year-on-year; and wholesale trade sales -1.9% year-on-year.”

Fourthly, the SARB started this hiking cycle as “normalising” interest rates. However, the country is now markedly above the last cycle of hikes.

Lastly, the SARB remains steadfast in its mission to anchor inflation expectations. 

“And, thus, they will be motivated to hike again.”

  • Prediction: 25 basis points increase

Maarten Ackerman – Citadel chief economist

Citadel chief economist Maarten Ackerman said the SARB’s March interest rate hike was motivated by higher-than-expected inflation data and the expectation that inflation will continue rising.

The latest CPI data confirmed this expectation, and, combined with the weakening rand, he expects the inflation pressure to remain for some time longer.

Ackerman said there is, therefore, a strong case for another hike come May, though maybe not one as aggressive as the 50 basis points hike in March.

  • Prediction: 25 basis point increase

Lourens Pretorius – Matrix Fund Managers fixed income portfolio manager

Matrix Fund Managers fixed income portfolio manager Lourens Pretorius said the SARB’s aggressive rate hike in March leaves monetary policy at arguably restrictive levels compared to the reserve bank’s Quarterly Projection Model.

Given the likely forward-looking inflation profile, this model suggests a 7.0% to 7.25% policy setting.

With its March hike, the SARB showed that its focus is on inflation rather than growth, as it reduced the economy’s potential growth to a mere 0.1% for 2023.

It, therefore, left little room for capacity constraints in the economy, being inflationary of nature.

The recent March headline inflation reading has also surprised marginally to the upside at 7.1%, with a broadening of inflation pressures evident and food inflation (14.6%) being a dominant driver.

Pretorius said he expects inflation will benefit from strong base effect unwinds following the anniversary of the Russia-Ukraine war. However, he also expects the SARB to be weary of the risks associated with this outlook.

This weariness is particularly motivated by the swing in the current account from surplus to deficit for the first time in three years and the effect this will have on the rand.

“We think the SARB is likely to increase the repo rate by a further 25 basis points to 8.0% in May and halt the current tightening cycle until there is sufficient evidence that inflation, as well as longer-term inflation expectations, move closer to the mid-range of the inflation target (4.5%).”

Pretorius also expects some mild accommodation back to 7.0% once the re-anchoring of inflation is achieved.

  • Prediction: 25 basis point increase

Arthur Kamp – Sanlam Investments chief economist

Chief economist at Sanlam Investments Arthur Kamp said the SARB’s MPC is concerned about high inflation expectations, tight global financial conditions, and the risk of the rand weakening against the backdrop of US monetary policy tightening.

These concerns were also top of mind at the March meeting, where an aggressive 50 basis point hike was announced.

Kamp said the rand’s sustained weakness presents an inflation risk, and the US Federal Open Market Committee meeting in early May 2023 is, therefore, a key event to monitor.

South Africa’s current account deficit also places pressure on the rand, which creates a dilemma for the SARB, which needs to decide between curbing inflation or providing relief to an ailing economy.

However, Kamp specified that the SARB did not cause South Africa’s growth problem. Instead, the problem reflects failing infrastructure, too much government involvement in economic activity, policy uncertainty, and low business confidence.

He said the best solution is for South Africa’s economic reform momentum to gain traction to lift the potential economic growth rate, attract foreign capital inflows to fund investment and alleviate the pressure on the balance of payments and the rand.

However, if this solution fails, the SARB must tighten macroeconomic policy.

Provided there have been no material changes to the SARB’s inflation outlook since March, the MPC is likely to at least discuss the merits of a pause in the interest rate hiking cycle, he said.

However, given the rand’s vulnerability and other contributing factors, another interest rate hike seems likely.

  • Prediction: 25 basis point increase

Adriaan Pask – PSG Wealth chief investment officer

PSG Wealth chief investment officer Adriaan Pask said the MPC revealed its priority at the March meeting – guiding inflation back towards the mid-point of the target band.

The MPC is focused on bringing down inflation to reduce the economic costs of high inflation and enable lower interest rates in the future.

“It, therefore, seems that they are still prioritising combating inflation over near-term growth challenges. Given that inflation numbers are still surprising to the upside, our expectation is that rates will be increased by 25 basis points,” he said.

  • Prediction: 25 basis point increase

*Headline image source: World Economic Forum/Jakob Polacsek


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