The South African Reserve Bank’s Monetary Policy Committee will meet next week to discuss the country’s final rate hike decision for the year, with an announcement on the move expected on Thursday, 24 November.
According to Investec chief economist Annabel Bishop, given the weak economic outlook for South Africa in the third quarter, weighted against still-high inflation, she expects the central bank to raise rates by 100 basis points (bp) at the next meeting.
South Africa has been on a significant rate hike cycle, with all five meetings held this year resulting in hikes. The hiking cycle started off with a 25bp hike a year ago (November 2021), taking the repo rate to 4.75%. By the September 2022 meeting, this had been hiked to 6.25% – a 250bp climb in the past 12 months.
- November 2021: 25 basis point hike
- January 2022: 25 basis point hike
- March 2022: 25 basis point hike
- May 2022: 50 basis point hike
- July 2022: 75 basis point hike
- September 2022: 75 basis point hike
According to Bishop, South Africa’s hike cycle has been in line with international central banks’ moves but still has room to go further.
“At the last MPC meeting, the committee discussed the possibility of a 100bp hike instead of the 75bp increase that was eventually delivered in South Africa’s repo rate – i.e. the members on balance choose the 75bp option. But this time around (the MPC) could deliver a 100bp lift,” she said.
“Currently, the US has hiked its interest rate by 3.75%, and SA by 2.75%, while the US is expected to hike by a further 50bp in December at its meeting on (14 December). Inflation is still high, despite having fallen in recent months, above both the US’ 2.0% implied target and SA’s 4.5% midpoint of its target range for the respective geographies’ inflation figures,” she said.
A 100bp hike would bring South Africa’s hike cycle in line with the US cycle.
According to Reserve Bank governor Lesetja Kganyago, the hike cycle has been in place to combat rising inflation, which is currently sitting far outside the bank’s targetted range of 3% to 6% at 7.5% in September.
However, at 6.25%, the repo rate is still below long-term levels, and in expansionary territory, he said, adding that the consequences of the central bank loosening its grip on inflation and falling behind global peers as rates are being normalized would be “too costly.”
“The best chance we have with monetary policy to get faster, more job-rich growth is to maintain our focus on price stability with flexible inflation targeting, a proven framework,” he said.
Bishop noted that sentiment has started shifting in the US, with the US Federal Reserve taking a less hawkish stance on interest rates and implying a slowdown in rate hikes.
“Communication from FOMC committee members have very lately become less hawkish, supportive of a rapid slowing in the US interest rate hike cycle from here. However, uncertainty still persists for policymakers and financial markets, reflected in volatility, while many risks to the outlook remain, including multifaceted risks,” she said.
Given that the ongoing Russia/Ukraine war is adding uncertainty to global markets, and there are signs of a weakening commodity market heading into the year-end, Bishop said that the Reserve Bank will likely be wary, and will balance still-high local inflation with weak economic growth prospects for the third quarter.
“We expect a 100bp increase on balance,” she said.
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