The South African Reserve Bank (SARB) is expected to increase interest rates by another 125 basis points (bps) by early next year, Absa said.
The SARB’s Monetary Policy Review (MPR) emphasised the need to anchor inflation expectations at the mid-point of the target range of between 3% and 6% over the medium term.
The SARB biannual MPC, published yesterday, gave an in-depth review of the global and domestic macroeconomic and financial market factors that underpin the monetary policy stance.
In its assessment of the global economy, the SARB notes that the world economy is currently seeing strong stagflationary dynamics.
It comes as growth projections have been consistently revised lower while inflation has risen sharply.
As interest rates rise in response to higher inflation, the MPR cautioned risks for economies with higher debt levels than they had before the pandemic, such as South Africa.
On domestic economic activity, the MPR said despite load-shedding constraining activity, household consumption and investment should support growth over the medium term.
However, it warned that intense load-shedding this year probably shaved about 1% off South Africa’s projected GDP growth.
Notably, the SARB forecasts household consumption growth of 3.2% in 2022 and 1.8% in 2023.
The SARB sees the peak in headline CPI inflation at Q2 22, and the risks to the outlook remain tilted to the upside.
The MPR expressed concern that higher inflation expectations had resulted in higher wage demands.
The MPR further argued that in an environment of elevated uncertainty characterised by higher inflation, “the possibility of inflation expectations de-anchoring creates substantial risks to the monetary policy framework and the economy”.
Against this, the MPR noted that with the SARB’s projections showing inflation above the mid-point of the target range over the medium term, further monetary policy normalisation would be needed.
The key question, of course, is how much.
Absa’s baseline view is for a further 125 basis points (bps) of tightening by early next year.
“We see risks to our view as slightly skewed in the direction of less tightening,” Absa added.
Efficient Group chief economist Dawie Roodt’s view
Efficient Group chief economist Dawie Roodt said SARB Governor Lesetja Kganyago had done an excellent job with interest rates.
Roodt said one of the reasons the rand is relatively resilient is because the SARB started with its tightening early in the cycle.
He also predicted further interest rate increases. “I predict another 75 bps, and after that, between 25 bps and 50 bps,” Roodt said.
He added that South Africa is not too far away from the turning point in the interest rate cycle.
The weak economy, declining commodity prices, and lower fuel prices will likely help to decrease inflation.
“We are likely going to see the end of the tightening cycle by the Reserve Bank, or at least the upper end, early next year,” Roodt predicted.
The chart below shows South Africa’s interest rate over the last year.