Large interest rate hike from South African Reserve Bank expected

Investec chief economist Annabel Bishop expects a 100 basis point (bp) interest rate hike from the South African Reserve Bank this week.

Dawie Roodt, the chief economist at Efficient Group, predicts a 75 basis point rate hike but added that the SARB might go for 100 basis points.

“It is not only because of the rest of the world increasing interest rates, but because the country needs tighter monetary policy,” he said.

Higher interest rates will be painful to the economy and affect economic growth, but he said it is much better than having high inflation for a long period.

“My money is on 75 basis points, but if I was the Reserve Bank, I would have gone for a full 100 basis points,” he said.

Other economists, including independent economist Elize Kruger and Old Mutual’s chief economist Johann Els, are less hawkish and expect a rate hike of 50 to 75 basis points.

The South African Reserve Bank’s Monetary Policy Committee (MPC) will meet this week to discuss the final rate hike decision for 2022. An announcement is expected on Thursday, 24 November.

South African economists agree that another big interest rate hike will follow the 75 basis point increase in September. The question is – how big?

At the September MPC meeting, the committee discussed the possibility of a 100bp hike instead of the 75bp increase that was eventually delivered.

“It means that the MPC members, on balance, choose the 75bp option, but this time around, could deliver a 100bp lift,” said Bishop.

She said the United States had hiked its interest rate by 3.75% and South Africa by 2.75%. The US is expected to hike by a further 50bp in December.

Another factor which could push the interest rate hike to 1% is inflation which remains high despite a decline in recent months.

Inflation in the United States is much higher than its implied target of 2.0%. In South Africa, it is also much higher than the 4.5% midpoint in its target range.

Bishop’s comments are in line with Reserve Bank governor Lesetja Kganyago’s comments that it would continue using interest rates to curb inflation.

Despite inflation declining for a second straight month to 7.5% in September, the SARB’s forecasts show that it will only return to the 4.5% mid-point of the target range by the fourth quarter of 2024.

“Inflation erodes the buying power of the population,” Kganyago said. “If the authorities do not step in a deal with inflation, we are selling our people short.”

Despite the SARB’s hawkish comments, Kruger believes a 75bp increase is the most likely scenario in November.

“I think the SARB will follow the Fed by hiking 75bps at this meeting, though my view is that the upper turning point of the current headline CPI cycle has been reached,” said Kruger.

“Thus, on a forward-looking basis, headline CPI will moderate into 2023 – in South Africa and globally – and should provide room to taper the magnitude of the hike to 50bp,” she said.

Old Mutual’s chief economist Johann Els agreed, saying there are increasing signs that global inflation is in peak territory and headline inflation rates should roll over soon.

“We are looking at another 50 basis points in rate hikes in this cycle, maybe 50 basis points in November or 25 basis points each in November and January,” Els said.

“That will likely be the end of this upcycle.”