More interest rate pain from SA Reserve Bank expected

The South African Reserve Bank (SARB) announced a 50 basis point interest rate hike at its latest Monetary Policy Committee (MPC) meeting, bringing the repo rate to 8.25%.

This increase is the 10th consecutive hike South Africa has seen in the current hiking cycle, which started in November 2021. 

Despite the multiple interest rate hikes, the SARB has largely failed to bring the country’s high, sticky inflation down and within its target band.

April inflation data provided some hope for a turnaround, as annual consumer price inflation hit 6.8% in April 2023 – the country’s lowest since May 2022.

However, SARB governor Lesetja Kganyago said, “Headline inflation is forecast to remain above the upper end of the inflation target range until the third quarter of this year and will only sustainably revert to the mid-point of the target range by the second quarter of 2025.” 

Meanwhile, the country faces the highest interest rates it has seen in a decade and muted economic growth.

While many may hope May’s hawkish hike marks the end of the hiking cycle, some experts believe the cycle has not yet hit its peak.

Arthur Kamp – Sanlam Investments chief economist

Sanlam Investments chief economist Arthur Kamp said the SARB’s recent hike underlined its “inflation-fighting credentials”. 

“It also signalled that inflation risk is skewed to the upside”, he said, which leaves the door open for possible future interest rate hikes. 

Kamp said two of the most significant risks to the interest rate outlook are changes in the rand and the outcomes of upcoming US Federal Open Market Committee meetings. 

The rand hit its lowest level yet against the US dollar following the SARB’s rate hike after trading above R19/USD in recent weeks.

“Rand depreciation can feed through into significant so-called second-round effects whereby the initial impact of higher import prices on inflation is amplified by higher production costs and/or wage demands,” he said.

“It is, therefore, concerning that the Bank warns: ‘Given upside inflation risks, larger domestic and external financing needs, and load-shedding, further currency weakness appears likely’.” 

The Reserve Bank responds to the inflationary impact of rand weakness rather than movements in the exchange rate itself. 

However, Kamp said the situation is worrying, “especially since load-shedding is driving up the cost of doing business, while food price inflation is expected to remain high”. 

“In this environment, second-round impacts could be significant.”

In addition, tight global financial conditions and high inflation worldwide, particularly in the US, could have a significant impact.

Kamp said the fundamental underlying problem for South Africa is a balance of payments constraint. 

“Net foreign capital inflows, deterred by low prospective returns, policy uncertainty and a lack of infrastructure, have been insufficient to fund the current account deficit,” he said. 

“This implies macroeconomic policy must be tightened. South Africa’s pressing socio-economic problems and the failure of specific state-owned companies have precluded aggressive fiscal policy tightening. Hence, the onus has been on the Reserve Bank to do the heavy lifting.”

He said it could not be guaranteed that South Africa has reached the top of the interest rate hiking cycle, and much will depend on the rand and inflation.

“At some point [interest rates are] likely to have the desired effect. As 2023 wears on, the focus may shift from interest rate worries to economic growth worries.”

However, a historical perspective gives some hope, as, in the past, the interest rate hiking cycle ended once it was clear inflation had peaked and was heading decisively towards the intended target. 

“On current information, we think we are approaching that point.”

Angelika Goliger – EY Africa chief economist

EY Africa chief economist Angelika Goliger said the SARB’s 50 basis point hike was unsurprising “given recent events”.

These recent events relate to continued load-shedding, upside risks to the inflation outlook, expected higher fuel prices, sticky global inflation and geopolitical concerns. 

Goliger said geopolitics has, unfortunately, very quickly become a significant economic issue in South Africa – “second to only load-shedding”.

The rand plummeted in mid-May when the US ambassador accused South Africa of supplying arms to Russia, threatening its relationship with the US and other Western countries.

“There is going to be a lot of uncertainty in the lead-up to the BRICS summit, which is to be held in South Africa on 22 to 24 August,” she said. 

“Our key trading partners, the US and EU, and the world will watch how the government engages with Russia before and during the summit.”

“In the coming weeks, we could see measures against entities based in third countries for allegedly helping Russia evade sanctions, as the EU wraps up its efforts to monitor the impact of current sanctions against Russia.”

She said the rand, which previously reflected confidence towards emerging markets, has become a measure of South Africa-specific investor sentiment. 

As South Africa’s import basket grows and its exports decline, the weaker rand and resultant inflation “is something that the SARB has no choice but to address”. 

Goliger predicts another 25 basis point hike at the next MPC meeting.

“In the context of load-shedding, weaker commodity prices, persistent inflation globally and now China’s recovery being weaker than initially anticipated, further missteps on the foreign policy front is something that the economy cannot afford.” 

“The SARB can only do so much to support the economy in this context.”

Dawie Roodt – Efficient Group chief economist

Dawie Roodt

Efficient Group chief economist Dawie Roodt told eNCA that South Africa’s monetary policy is currently restrictive. 

“And that’s exactly what the Reserve Bank is trying to achieve – to put a damper on general demand in the economy,” he said. 

However, he said there is “a certain point when interest rates are so high that it’s starting to become a drag on the economy”.

Roodt explained that monetary policy is a very blunt instrument, and a rise in interest rates damages the economy, which is bad for economic growth. However, “that is all that we can do”.

“There are many other things that can and should be done to lower inflation, but those things are politically just not feasible to do.”

Roodt used South Africa’s lack of electricity supply, which makes the country uncompetitive, as an example.

“The railroads do not work, the local authorities do not work, and the list goes on, and the list goes on.”

These factors lead to upward pressure on inflation and force the Reserve Bank to use “this very blunt instrument called interest rates”.

While this tool is blunt and potentially destructive, the alternative is likely more so.

If the Reserve Bank elects not to raise interest rates, the country will see far higher inflation levels, which guarantees weak economic growth.

“So, the right answer is to fix those other things in the economy. You must fix the structural issues in the economy because we cannot keep on leaning this much on the Reserve Bank to get inflation lower.”