The South African Reserve Bank (SARB) will hike interest rates by 25 basis points in November due to the rise in global oil prices, a bird flu outbreak, and a volatile rand.
This was the warning in Bank of America’s Global Research Emerging Insight report, South Africa – All Change, Not Done Hiking.
“A combination of rising oil prices, a higher-for-longer rates narrative and fiscal risks in emerging markets are likely to weaken emerging market currencies further, and a stronger dollar should continue to weaken the rand, in our view,” Bank of America said.
Due to rising international oil prices, local fuel prices in South Africa increased by 7.5% in September and 4.7% in October.
Bank of America (BofA) now estimates that headline inflation will reach 5.2% in September, 5.7% in October, and an average of 5.6% in the fourth quarter. This is up from their previous estimate of 5% inflation at year-end.
“The oil supply shock is negative for emerging market currencies, including the rand, because the dollar is likely to remain strong till year-end.,” senior economist Tatonga Rusike said.
“We maintain our view that dollar weakness will bring rand strength into 2024.”
Apart from rising oil prices and higher inflation pushing the SARB to raise rates, Bank of America expects the Federal Reserve to hike rates by 25 basis points at its meeting in November.
The combination of rising oil prices and higher-for-longer rates in the US and other developed markets will likely weaken the rand further in 2023, raising the prices of imported goods.
This trend will continue until the Federal Reserve begins cutting rates, which Bank of America expects to begin in June 2024.
Reserve Bank remains vigilant
The Reserve Bank has more work to do to rein in inflation that remains elevated, with higher food and oil costs posing risks to the outlook for price growth, Governor Lesetja Kganyago said.
“The job on the inflation front is not yet done,” he told Francine Lacqua in a Bloomberg Television interview on Wednesday in Marrakech, where the IMF and World Bank are holding their annual meetings.
“We remain vigilant and stand ready to deploy our tools as necessary.”
Kganyago has consistently toed a hawkish line on price pressures, warning of potential risks that could push it higher, including a weaker rand and rising oil prices.
South Africa is also amid an outbreak of avian flu that risks pushing up chicken prices — an important source of animal protein in the country.
South Africa’s central bank held interest rates at 8.25% on 21 September, leaving the door open to more tightening to curb inflation if needed.
The monetary policy committee will deliver its next rate decision on 23 November.
In August, annual inflation in South Africa was 4.8%, near the midpoint of the central bank’s preferred target range of 3% to 6%. The rate has declined from a peak of 7.8% in July, which was the highest since 2009.
“We would still want to see a number of readings that would suggest that inflation has declined sustainably toward our target,” Kganyago said.
In forecasts updated last month, the central bank expects inflation to average 5.9% this year, down from a prior estimate of 6%, slowing to an average of 5.1% in 2024.