Jeff Schultz, senior economist at BNP Paribas South Africa, expects a 75 basis point rate hike and a hawkish statement from the South African Reserve Bank on 22 September.
Schultz said they also expect further rate hikes to follow, with a 7.00% terminal rate to be reached in January 2023.
“Our above-consensus view reflects rising unit labour costs, sticky two-year inflation expectations, and the prospect of rand weakness on a return to twin deficits,” he said.
His statement follows data from the United States that inflation increased to 8.3% year-on-year, higher than forecasts.
Many analysts predicted a 75 basis points rate hike in the United States next week, and the latest inflation numbers cemented the move as a near certainty.
All data points came in hotter than expectations and worse than last month’s report that provided a glimmer of hope that inflation may be subsiding.
The market expectation of a more aggressive Fed had a near instant effect with a strengthening dollar.
It impacted the rand, which weakened from R17.00 to R17.30 to the greenback in less than 30 minutes.
The growing interest rate differential will likely pressure the South African Reserve Bank to emulate the global outsized rate hikes.
Not everyone is certain that higher interest rates are the best route to follow.
Adriaan Pask, CIO at PSG Wealth, said a key question facing economies is the extent to which monetary policy tightening will be able to bring inflation under control.
“Central bank actions have limited ability to bring cost-push – i.e. supply side – factors under control and the risk is that aggressive hikes may tip the US economy into recession,” he said.
Despite the uncertainty, Efficient Group chief economist Dawie Roodt has confidence in the South African Reserve Bank’s decision to hike rates.
Roodt said the rand’s resilience is a result of the SARB starting the tightening cycle relatively early.
He expects the SARB governor Lesetja Kganyago to further increase interest rates in the coming months, starting with 75 basis points. It will be followed by smaller increases.
“We are not far away from the top turning point in the interest rate cycle,” Roodt said.
He added that inflation is also close to its peak, especially with the recent decrease in the petrol price.
“With the weak economy and commodity prices coming down, I expect the upper turning point of the Reserve Bank’s tightening cycle early next year.”