Most economists expect the South African Reserve Bank’s Monetary Policy Committee to raise the repo rate by 50 basis points (bps) to 7.5% on Thursday.
Mokgatla Madisha, head of fixed interest at Sanlam Investments, is one of the experts who expects a 50 basis points interest rate hike. However, he warns that it is not a certainty.
“Given that they are nearing the end of the hiking cycle, any number of outcomes are possible at this meeting,” he said.
Since the November meeting, inflation has declined further from 7.4% to 7.2%, and core inflation, which excludes volatile items of food and energy, came out at 4.9% from 5.0%.
Annual inflation remains well above the upper target band of 3% to 6%, but the quarter-on-quarter rate declined from 4.4% to just 3.3% in December.
“We know that in setting policy, the MPC is not only concerned about local factors,” Madisha said.
“They also consider developments in international markets to the extent that they impact the currency and hence inflation.”
The signals coming from the United States are going to be particularly challenging for the MPC to interpret.
They can listen to the markets on the path of rates in the United States or give more weight to what the Fed governors themselves say.
The market is signalling that there is one more hike of 25bps and that rate cuts will start from July.
However, the Fed governors insist that they see policy above 5%, which will require at least 50bps hikes, and they expect to keep it restrictive for some time.
On Monday, the European Central Bank (ECB) President, Christine Lagarde, said, “rates will still have to raise significantly and steadily until they are sufficiently restrictive and stay at those levels for as long as necessary.”
Since the last MPC meeting, China has removed most of its COVID-19-era restrictions. The reopening of that economy will give a significant boost to global growth.
More activity in the Chinese market will also increase demand for commodities, which could result in higher prices.
We can also expect the MPC to spend a lot of time on the ongoing electricity crisis in the country and its impact on growth.
A negative output gap as well as the difference between the current and potential growth rates, should generally lead to lower inflation as demand is generally weak.
However, chronic load-shedding is impacting the supply side of the economy, too. “In recent days, we have seen articles about how food supplies are being affected by lack of electricity,” Madisha said.
Madisha and Sanlam Investments expect the MPC to raise the repo rate by 50bps to 7.5%, as a restrictive policy stance is necessary to bring inflation back within the target.
“High rates will support the currency against still rising rates in developed markets and possible greylisting by the Financial Action Task Force,” Madisha said.
Many economists and investment specialists agree with Madisha’s prediction but warn that the South African Reserve Bank may surprise with a lower increase.
Wayne McCurrie from FNB Wealth and Investments said the SARB would most likely increase rates by 50bps, but there is a “very big chance” of 25bps.
McCurrie added that the Reserve Bank is very near the end of the rising interest rate cycle.
Efficient Group chief economist Dawie Roodt expects the Reserve Bank to increase interest rates by 50 basis points, followed by 25 basis points after that.
“After that, we are pretty much done, based on what we know at the moment,” Roodt said. “The worst is behind us unless something goes horribly wrong.”
Investec chief economist Annabel Bishop also said it is likely that the Reserve Bank’s MPC will increase interest rates by 50 basis points this month.