South African Reserve Bank interest rate hike expected

Most economists and investment specialists expect another interest rate hike from the South African Reserve Bank (SARB) when its Monetary Policy Committee (MPC) meets on Thursday. Whether this hike will lean dovish or hawkish is unclear.

South Africa has the highest interest rate in a decade, with the repo rate at 7.75%.

The country is in a hiking cycle which started in November 2021. Since the cycle began, the SARB has implemented nine consecutive interest rate hikes.

The SARB has implemented a cumulative 435 basis points of hikes in this cycle to bring rising inflation within its target band of 3% to 6%.

However, their efforts have been unsuccessful thus far, as inflation has remained stubbornly high. March’s inflation data showed CPI standing at 7.1% and food inflation at a 14-year high of 14.0%.

Many experts predicted an end to the hiking cycle after the previous MPC meeting in March. However, the SARB’s hawkish implementation of a 50 basis point hike when the market predicted a 25 basis point hike lowered expectations for relief.

In addition, load-shedding continues to place upside pressure on inflation.

The fact that both power cuts and high interest rates mute economic growth with be an important factor for the SARB to consider.

The SARB building in Gauteng

Since the last MPC meeting, the rand’s weakening has also become an increasingly important factor to consider.

The rand fell to its lowest point against the US dollar last week after the US ambassador to South Africa accused the country of supplying Russia with weapons to aid its war against Ukraine. The currency has remained above R19/USD since.

However, SARB governor Lesetja Kganyago has said they are not concerned with the rand’s performance against the dollar.

He said the Reserve Bank is primarily responsible for protecting the currency’s value – “not what it can buy in New York or Hong Kong or London or Frankfurt – what it buys at home”.

Ahead of its May meeting, the MPC finds itself in a difficult position – it must balance economic growth, rising inflation, and the impact of another interest rate hike.

When considering all these factors, experts are far less optimistic – and more at odds – about the outcome of the next MPC meeting. 

The experts below all agree another hike is inevitable, given the country’s sticky inflation. However, the extent of policy tightening the SARB will enforce is unsure.

Lourens Pretorius – Matrix Fund Managers fixed income portfolio manager

Matrix Fund Managers portfolio manager Lourens Pretorius said the SARB must navigate difficult policy options at its next MPC meeting.

“When a country exhibits structural external account deficits, policymakers can allow their currency to depreciate sufficiently and act as an automatic stabiliser to increase the competitiveness of the country’s goods and services to international buyers,” he said.

“This would result in a temporary domestic inflation spike, which should subside once the currency stabilises at weaker levels, assuming one expects a one-off currency adjustment.”

However, South Africa’s currency weakness is largely a result of electricity insecurity and general infrastructure neglect. 

Therefore, a weaker and more competitive currency will not necessarily lead to more exports, meaning the risk of an inflation spike in the interest of a more competitive economy is likely not worth taking.

Interest rate increases, however, are also a blunt tool, “mainly dampening internal demand further and, hopefully, in the process, keeping some sort of lid on inflation”. 

“On the other hand, increasing interest rates to protect the currency would require significant increases, in the order of 200 basis points or more,” said Pretorius. 

“Such increases are something that our economy can hardly afford. We would be sacrificing already dampened growth prospects to protect the rand, which is intolerable.”

Pretorius expects the SARB will be cognizant of the various trade-offs but lean towards their prime mandate – protecting the rand’s purchasing power. 

For the upcoming meeting, he expects a further increase in the repo rate by 50 basis points “and guidance of further likely tightening amidst persistent above-target inflation and risks to inflation and the currency on the upside”. 

  • Prediction: 50 basis point increase

John Jack – Galetti Corporate Real Estate CEO

Galetti Real Estate CEO John Jack predicts a 25 basis point increase will be announced at the upcoming MPC meeting.

Jack said this increase would significantly impact the commercial real estate sector, “which is already facing the effects of load-shedding, increasing upkeep costs, and high vacancy rates”. 

“Landlords are going to be caught between a rock and a hard place: they’ll be dealing with rising interest rates and levies on one side and the need to keep their tenants happy with affordable rental escalations on the other.”

In addition, increased load-shedding, which may soon hit stages 7 and 8, means landlords are under increasing pressure to find alternative energy solutions. 

“At stage 8 load-shedding, electricity may be off for up to 13 hours each day. Landlords place their tenants at significant risk if they cannot provide them with power,” he said.

However, some optimism remains as both the public and private sectors are working together to find solutions to these challenges. 

“Companies like Investec are partnering with local agencies to address traffic congestion during load-shedding, while the solar panel tax incentive announced in February’s National Budget is making sustainable energy solutions more feasible for homeowners and companies.”

Jack urged landlords to make the most of available tax rebates, which make the installation of sustainable alternative power sources feasible. 

“We also advise negotiating with banks and loan providers, to secure more favourable property interest rates, as this also enables you to pass savings on to your tenants. For best results, work with an advisor who has experience managing these negotiations.”

“All in all, it’s tough out there in the South African commercial property sector – but we can overcome these challenges together with a bit of creativity and collaboration.”

  • Prediction: 25 basis point increase

Maarten Ackerman – Citadel chief economist

Citadel chief economist Maarten Ackerman said the Reserve Bank is between a rock and a hard place.

He said the South African economy is currently “very, very weak”, and the country will likely see a recession soon.

However, the SARB is firmly focusing on inflation, and the recent weakening of the rand implies inflation will likely remain under pressure.

According to Ackerman, given the current circumstances, the SARB might decide to only increase the interest rate by 25 basis points.

  • Prediction: 25 basis point increase

Xhanti Payi – PwC South Africa senior economist

PwC senior economist Xhanti Payi expects the SARB will raise interest rates by another 25 basis points during its next meeting, although 50 basis points are also on the cards. 

Before the recent weakening of the rand, Payi said he expected just 25 basis points. However, the rand’s performance raised concerns about imported inflation, which convinced him that “the Reserve Bank may be motivated to hike a little more steeply”.

“In April, the Reserve Bank observed that the real repo rate was below its estimated steady-state neutral level of 2.5%. At that time, the real repo rate was 185 basis points or 1.85% below the steady-state neutral level of 2.5%. That suggested space for further increases.”

However, when looking at the SARB’s own inflation forecasts, that gap would have narrowed significantly in the third quarter and closed by the fourth quarter. 

The rand’s volatility suggests this gap could remain wider for longer, making further hikes likely.

“However, we think that the poor economic data we’ve seen recently will limit the Reserve Bank’s ability to hike more than 25 basis points at a base level or 50 as a leap for the remainder of the year – especially given the last surprise hike of 50 basis points during their previous meeting.”

  • Prediction: 25 basis point increase

Jan-Daan van Wyk – Stonehage Fleming senior analyst

Stonehage Fleming senior analyst Jan-Daan van Wyk said the SARB continues to face mixed data. 

“Elevated inflation to date has been driven by the supply side and is essentially reflecting the cost of load shedding – with businesses, especially food producers and retailers, passing on some of the costs of alternative electricity sources and a weaker currency.”

“Measures reflective of demand-driven inflation, such as residential rentals, house prices, and wages, remain relatively muted. Additionally, South Africa remains growth-constrained, which doesn’t lend itself to a restrictive monetary policy setting.”

This makes the Reserve Bank’s job tough, as higher interest rates are meant as a tool for cooling aggregate demand. 

Van Wyk said the SARB’s surprise 50 basis point increase at its March meeting was largely driven by the MPC’s significant revision to its expected inflation for 2023, from 5.4% to 6.0%. 

“This seems to have become a theme, whereby the MPC is focused more on the shorter-term upside risks to inflation.”

Prior to the US’ recent accusation that South Africa sold arms to Russia and its effect on the rand, markets were pricing in another 25 basis point increase to the repo rate at the upcoming MPC meeting. 

However, this prediction has moved to up to 50 basis points to 75 basis points as the rand reached its weakest level against the US dollar and third weakest post-GFC on a trade-weighted basis. 

“We expect focus on the local currency to be a strong feature at this next MPC meeting, viewed more, however, through the lens of impacts on inflation rather than as a result of narrowing interest rate spreads versus major DM’s,” he said.

  • Prediction: 50 to 75 basis point increase

Dawie Roodt – Efficient Group chief economist

Until about a month ago, Efficient Group chief economist Dawie Roodt expected that South Africa had reached the end of the tightening cycle.

However, the recent developments with the rand have made it so the SARB “won’t have much of a choice but to increase interest rates again”.

Roodt said that, depending on what happens to the rand, there is a good chance that the Reserve Bank will increase the repo rate by another 50 basis points.

This will be “very painful to the economy”, he said. “The economy is not growing, and if the Reserve Bank increases by another 50 basis points, I think, chances are, that the economy will be in a recession for this year.”

However, Roodt said the Reserve Bank is not to blame. 

“We should blame our political leaders because they’ve created an uncompetitive macroeconomic environment, and their political shenanigans also contribute to a very weak currency, which filters through to high inflation.”

  • Prediction: 50 basis point increase


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