Reserve Bank interest rate hike warning

Anchor Capital’s Reko Nare said food and fuel inflation could see the South African Reserve Bank (SARB) implement another interest rate hike later this year.

At its last meeting, the SARB’s Monetary Policy Committee (MPC) decided to pause the interest rate hiking cycle that started in November 2021.

Since the cycle started, the MPC has implemented ten consecutive interest rate hikes and a cumulative 475 basis points of hikes.

However, at its July meeting, the MPC paused the cycle in light of June’s positive inflation data, which showed annual CPI fall within the Reserve Bank’s target range of 3% to 6% for the first time in 14 months.

This positive inflation trend continued in July when inflation – which came in at 4.7% – reached its lowest level in two years.

This reading is also close to the mid-point of the target range (4.5%), around which SARB Governor Lesetja Kganyago wants to anchor the country’s inflation.

Inflation’s downward trajectory in recent months and the MPC’s decision to pause the hiking cycle have sparked hope that the hiking cycle could end and that the country may see interest rate cuts as soon as the end of 2023 or early 2024.

However, the MPC specified at its last meeting that this pause does not necessarily signify the end of the hiking cycle, as there are still upside risks to inflation. 

Kganyago said the SARB would remain data-dependent, which will inform the MPC’s decision at its 21 September meeting. 

Nare told Moneyweb Now that, on the back of July’s positive inflation data, the SARB is unlikely to continue the hiking cycle at its September meeting.

“After months of red hot inflation, local investors did embrace last week’s positive inflation print with open arms,” he said.

Nare said July’s lower-than-expected inflation rate was largely driven by a decrease in fuel prices over the month.

While celebrated by motorists and consumers, Nare said it needs to be balanced with the expectation that there will be a significant fuel price hike in the coming month.

However, he said, “We are sceptical about how long these positive surprises to inflation will last.”

This is because there are still several risks to the inflation outlook.

While South Africa’s inflation is cooling, “the question is whether it’s trending downwards far enough and fast enough”.

“And that’s obviously a question that only the SARB can answer. All eyes will be on the SARB as far as their next steps.”

One significant risk to inflation is the higher fuel prices expected to come in September.

Another threat to the inflation outlook is food inflation, which has been one of the main inflation drivers over the past few months.

Nare said food inflation remains stubbornly high, and there is a persistent risk that this will keep inflation expectations higher for longer.

Considering these risks, Nare said the possibility of another interest rate hike should not be dismissed.

While it likely won’t happen at the next meeting in September, Nare said there is a chance for a further 25 basis point hike at the November meeting.

However, Nare believes interest rate cuts are also on their way, and the SARB could start cutting rates as soon as Q1 2024.