South African Reserve Bank interest rate expectations

The Monetary Policy Committee (MPC) is set to meet again on 28 March, and economists are gearing up their interest rate expectations for the next cycle.

Experts expect another small interest rate increase this month and a continuation of the inflation rate’s decrease from the July 2022 high.

Currently, South Africa’s inflation rate is 6.9%, well above the South African Reserve Bank’s (SARB) target range of 3% to 6%.

In the latest MPC meeting in late January, the SARB only raised its benchmark repo rate by 25 basis points – defying the market’s expectations of a 50-point increase.

This hike pushed the repo rate to 7.25% and the prime lending rate to 10.57%. 

It was also the SARB’s eighth consecutive rate hike since it implemented policy normalisation in November 2021. It was implemented to anchor inflation expectations around the mid-point of the SARB’s target band.

January’s inflation rate of 6.9% is the closest South Africa has come to the SARB’s target band since May 2022.

Standard Bank is optimistic that South Africa will be within this target come year-end.

In its recent results, the company said it anticipates interest rates to increase by an additional 25 basis points in the first half of 2023, followed by a pause. 

It expects inflation to moderate to 5.9% in the year ahead.

Nedbank, in its recent results, shared this sentiment.

The Nedbank Group Economic Unit forecasted interest rates to increase by 50 basis points from December 2022.

A 25 basis point increase would take the repo rate to 7.5% and the prime lending rate to 11% by the end of the year. 

Nedbank also expects inflation to reduce from 2022 levels and average 5.5% in 2023, which would put inflation squarely within the target band.

SARB remains steadfast

SARB Governor Lesetja Kganyago confirmed the experts’ predictions at the start of this year.

Speaking to CNBC Africa at the World Economic Forum’s annual meeting in Davos, he said the SARB would continue to increase interest rates for as long as inflation falls outside the target band.

He said inflation increased like a rocket over the last year but declined much slower despite regular interest rate hikes.

However, while SARB may be gaining the upper hand on inflation, risks like power outages that add to food production costs and doing business mean Kganyago is reluctant to pivot away from policy tightening.

“What we need to see is inflation declining firmly to within the inflation targeting range of 3% to 6%,” he said.

Slaying the inflation dragon

Old Mutual Wealth strategist Izak Odendaal warned that falling inflation “does not mean the inflation dragon has been slayed”.

The recent declines in goods and commodity prices – which reached a record high in 2022 – have resulted in falling headline inflation rates.

However, Odendaal warns that global forces, like a stronger-than-expected economy in the US and Europe, mean the path to low and stable inflation will not be a quick or smooth process.

Inflation in China has also been picking up as the country’s economy reopened after months of lockdowns.

“Overall inflation is subsiding, but with different components moving at different speeds in different places,” he said. “This implies that the global rate hiking cycle is not over yet.”

In addition, South Africa’s ingrained inflationary psychology could lead to unexpected results.

Despite the global surge in fuel and food prices, businesses in South Africa are facing unusual cost pressures due to the country’s electricity crisis.

The rand has also been under immense pressure, which, in turn, puts upward pressure on prices.

However, domestic demand is weak, so businesses are unlikely to raise their prices, as their clients cannot afford to pay them.

On the other hand, in the country’s formal sector, annual inflation adjustments to wages and salaries are common and disconnected from productivity growth, which persists despite high unemployment. This is in contrast to the experience in developed economies.