High hopes for Reserve Bank interest rate decision

The Bureau for Economic Research (BER) said it now expects the South African Reserve Bank (SARB) to keep the policy rate unchanged at its upcoming meeting after initially expecting another rate hike.

The SARB’s Monetary Policy Committee (MPC) is set to meet on Thursday, 23 November, where they will decide whether to hike the repo rate again or keep it steady for the third consecutive meeting.

The current hiking cycle has been ongoing for two years and has seen the MPC hike the repo rate by 425 cumulative basis points.

This has brought the repo rate to 8.25% – the highest it has been in over a decade.

At its last two meetings, the MPC paused the hiking cycle, as inflation had fallen and was within the 3% to 6% target range.

However, headline inflation has steadily increased again, jumping to 5.4% in September, although it is still within the target.

This has sparked fears that the MPC would vote to hike the repo rate again to temper inflation.

Initially, the BER pencilled in a final 25 basis points hike in the repo rate. However, it now expects the SARB to keep the policy rate unchanged at the November meeting. 

“The main reason for the change is that some of the upside risks to inflation, particularly from the rand and oil price, have receded,” the BER explained. 

“While the slowdown in CPI inflation was interrupted, and we expect a further reacceleration in headline CPI in October to 5.8% year-on-year, a general moderation in price increases is expected to take hold from the second quarter of 2024.

The BER expects CPI to reach the midpoint of the SARB’s target by around Q4 next year. 

In addition, while the rand exchange rate weakened through late September and early October, it has since recovered these losses. It is now trading on a stronger footing to the dollar compared to the September meeting.

Another important reason for the BER’s revision is that the Brent crude oil price has come down by around $10/barrel since the most recent meeting. 

“We are also likely at the peak of the global interest rate hiking cycle,” the BER said. 

However, it warned that the SARB would likely signal that it remains ready to hike the policy interest rate further should data point to a reacceleration in price pressure, with upside risks from food prices top of mind. 

“Furthermore, the bank is likely to keep a keen eye on inflation expectations to see whether these start to drift back to the midpoint of the target band.”

“As such, while no longer our view as stated earlier, a November hike remains possible. Importantly, hike or no hike this week, the SARB will likely keep the repo rate restrictive well into next year.”