More interest rate hikes from SARB expected – and the impact on the JSE

Lesetja Kganyago

The South African Reserve Bank (SARB) governor Lesetja Kganyago has highlighted the need for further interest rate hikes, which can significantly impact the local stock market.

The SARB’s monetary policy committee (MPC) raised interest rates by 0.75% to 6.25% in September, following a similar hike in July.

These interest rate increases were in response to rising inflation. South Africa’s inflation rate rose from just above 3% at the beginning of 2021 to 7.8% at its peak in 2022.

Many economists predicted that the 7.8% inflation rate was the peak level for this cycle as energy prices pulled back.

Despite declining inflation over the last two months, another interest rate increase is expected in November. A Bloomberg poll conducted last month predicted a 0.50% hike.

A Reuters poll, in comparison, found that most economists expect a 0.25% increase in November and another 0.25% increase early next year.

While there is a difference in opinion of the SARB’s expected interest rate increases, it is clear that they will rise.

Kganyago said local borrowing costs would only be lowered when inflation retreats toward the midpoint of the central bank’s target range of 3% to 6%.

“Once you see inflation declining back within the target and moving toward 4.5%, that would be telling you that the interest rate cycle has done its job,” he said.

For investors, it is important to be aware of the effects of interest rate movements on the economy and the stock market to make informed investment decisions.

Analysing South Africa’s interest rate against the FTSE/JSE All-Share Index (ALSI) from 2000 to 2022 reveals pronounced interest rate cycles between 2001 and 2006 and between 2006 and 2014.

These periods can be isolated and viewed separately to better understand the impact of interest rate movements on the stock market, or at least how they move relative to each other.

2001 to 2006

In the first cycle, interest rates increased from 10.50% to 13.50% from 2002 to mid-2003. Over this period, the FTSE/JSE ALSI fell by 21%.

The first interest rate cut arrived in August 2003, followed by regular decreases over the following three years. Over this period, the FTSE/JSE ALSI increased by 157%.

2006 to 2014

The second interest rate cycle started in mid-2006. Interest rates increased from 7% to 12% from 2006 to 2009.

Over this period, the FTSE/JSE ALSI had a less pronounced reaction to the interest rate increases, and it had a lagging response to the rate hikes. However, it did fall by 17% over this period.

From 2009 to 2014, interest rates were lowered from 12% to 5%. Over this period, the FTSE/JSE ALSI returned 113%.

Current Cycle

Within the current interest rate cycle, the FTSE/JSE ALSI fell by 7.4% since the first interest rate increase.

The charts illustrate a clear trend that the stock market declined when interest rates increased and showed strong growth in a declining interest rate environment.

However, it is important to note that the variation in the stock market is affected by many factors and cannot solely be attributed to interest rate movements.

When interest rates are low, borrowing funds to invest in assets is cheaper. As companies increase their investments, production increases, boosting profits and the overall market.

When interest rates increase, financing becomes more expensive. Businesses would rather save their excess funds in higher-interest savings accounts than expand operations.

Existing loans also become more expensive, putting downward pressure on profits and operations.


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