Nedbank’s July 2023 Guide to the Economy forecasts a 25 basis point South African Reserve Bank (SARB) interest rate hike in July, as inflation is expected to stay high.
The SARB’s Monetary Policy Committee (MPC) has been in a hiking cycle since November 2021 with ten consecutive rate hikes. This was done to bring South Africa’s sticky inflation down and within the SARB’s target range of 3% to 6%.
The MPC hiked interest rates by 50 basis points in May, taking the repo and prime rates to 8.25% and 11.75%, respectively.
According to Nedbank, this aggressive stance was mainly motivated by South Africa’s poor inflation outlook and elevated expectations.
At the last MPC meeting, the SARB raised its headline and core inflation forecasts. Headline inflation is expected to average 6.2% and 5.1% in 2023 and 2024, respectively, up from 6% and 4.9% previously.
“The SARB sees continued upside risks to inflation emanating from sticky world inflation, expectations of tighter global oil markets and a vulnerable rand,” the bank said.
“Given volatile global risk sentiment amid fading world growth and the threat of further US rate hikes, the risk of another bout of severe rand weakness remains high. Other risks include higher domestic electricity tariffs and other administrative prices.”
The outlook for domestic food inflation also remains uncertain, threatened by rising production costs due to severe load-shedding and the risk of drier weather conditions in the upcoming planting season as concerns.
South Africa’s food inflation reached decade highs in 2023, which has largely driven the country’s high headline inflation.
The bank warned that elevated living costs could also fuel another round of higher wage settlements even with lower labour productivity.
Despite the numerous rate hikes, the SARB revised its growth forecast for this year up slightly to 0.3% from 0.2%. The MPC assessed the risks to the medium-term domestic growth outlook to be balanced.
May’s inflation outcomes indicated a downward trend in inflation which, while suggesting that inflation could return to the SARB’s target range earlier than expected, does not discount another rate hike.
This is because the MPC will likely remain cautious despite these positive signs.
“Consequently, the SARB is forecast to hike rates one more time by 25 basis points in July, taking the repo rate and prime lending rate to peaks of 8.5% and 12%, respectively,” the bank said.
“We expect monetary easing to start in early 2024, with the MPC cutting rates by 100 bps by the end of the year.