Big interest rate hikes expected from the South African Reserve Bank

The latest Thomson Reuters Econometer poll published on Friday shows that analysts are now more hawkish on the interest rate outlook for South Africa.

The Thompson Reuters Econometer results show the consensus repo rate forecast at 6.75% in Q4 2022 compared with 6.50% in the September poll.

Moreover, analysts expect interest rates to peak at 7.25% in Q1 2023, 0.5% higher than in the previous poll.

Absa shares the view that there will be more aggressive interest rate hikes, predicting a repo peak of 7.50% in January.

Absa believes the South African Reserve Bank’s (SARB’s) Monetary Policy Review (MPR) will likely start cutting rates from early Q4 2023. Consensus forecasts see cuts starting in Q1 2024.

Meanwhile, analysts’ forecasts of inflation remain broadly unchanged.

Consensus CPI forecasts for Q4 2022 are unchanged at 7.2% and 6.9% for Q1 2023, while Absa’s forecasts are 0.2% lower for both Q4 2022 and Q1 2023.

“For 2023, headline CPI inflation is expected to be 5.5%, broadly in line with our forecast,” Absa said.

Meanwhile, following the 0.7% quarter-on-quarter contraction in Q2 GDP, consensus now expects growth to rebound by 0.5% in Q3 2022 and by a further 0.2% in Q4 2022.

The Reuters poll remains lower than Absa’s forecast of 0.7% in both Q3 and Q4.

However, Absa warned that there is considerable downside risk to its Q3 forecast because of the severe power cuts during the quarter.

Consensus expectations for 2022 GDP remain unchanged at 1.9%, against Absa’s forecast of 2.2%.

2023 GDP consensus now stands at 1.4%, down from the previous 1.5%.

Interest rate hikes the right thing – Lesetja Kganyago

The hawkish interest rate outlook for South Africa is not surprising considering Reserve Bank Governor Lesetja Kganyago’s recent comments on rate hikes.

He said the Federal Reserve is doing the right thing by raising interest rates to tackle high inflation, even as it strengthens the dollar and has spillover effects for other nations.

The Fed’s mandate of low inflation, maximum employment and financial stability for the United States is “a complex-enough job,” he said.

If the Fed “must then also figure out the well-being of the world’s citizens, it’s an impossible task”.

“Not dealing with inflation timeously could lead to higher costs down the line as policy would have to respond even more aggressively in the future,” Kganyago said.

“Acting now rather than later means that the costs of acting now are less than the costs of acting later.”

South Africa’s monetary policy committee responded quicker and faster than most other central banks to the worst global inflation shock in a generation.

The SARB increased its benchmark rate by a cumulative 275 basis points since November.

It sees the need to keep lifting borrowing costs to stabilise and lower the nation’s inflation rate.