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South Africans should expect higher interest rates this week, say economists

South Africans should expect higher interest rates this week, say economists

The South African Reserve Bank is likely to hike interest rates by a further 25 basis points this week to 4.25% in an attempt to slow inflation, say economists.

A Reuters poll of economists said prices could rise faster than they had expected before Russia’s invasion of Ukraine. Fifteen of 19 economists polled in the last week predicted the repo rate would rise by 25 basis points to 4.25% on March 24, while the remaining four said it would be left unchanged.

“The decision, statement, and tone are likely to strike a more hawkish note, though at the same time, acknowledge a high degree of uncertainty,” said Jeff Schultz – senior economist at BNP Paribas South Africa.

He said that higher inflation projections and adjustments to the interest rate gap model – due to higher rate hike assumptions – means that the central bank’s quarterly projection model is very likely to imply a faster pace of hikes compared to its January estimates.

“Though a 50bp hike is unlikely to be delivered, we do not rule this out from May, depending on the evolution of oil and food prices and their imminent second-round impacts on expectations,” Schultz cautioned.

“While the decision itself is unlikely to come as a surprise, we think the statement and quarterly projection model outputs are likely to be closely scrutinised for signs of a central bank becoming increasingly uncomfortable with the inflation outlook with deeper negative real rates likely to ensure over the coming quarters,” he said.

Since starting the normalisation of interest rates cycle, the SARB has hiked twice – 25bp each in November 2021 and January 2022, taking policy rate to 4%, Tatonga Rusike, Sub-Saharan Africa economist for BofA Securities noted.

He said that since the January MPC, several developments have taken place: Russia/Ukraine conflict resulting in rising oil prices; stronger ZAR per USD; lower increase in Eskom tariff than baseline; and the Fed has initiated its hiking cycle in a hawkish tone.

“Our base case is a 25bp hike taking policy rate to 4.25%. 50bp will be a discussion but not a decision, in our view.”

Brent crude oil prices have shot up averaging $94 per barrel in February and $110 per barrel in March, so far, Ruskike said.

“South Africa is an oil importer. High oil prices are negative for inflation. We estimate 2022 inflation to average 5.5% – previously 5.1% before the conflict. March and April inflation likely to exceed 6% before moderating back into target range.”

BofA Securities said that the SARB is likely to revise its inflation outlook higher above 5% (BofA 5.5%). An alternative inflation outlook is 5.3% with oil price averaging $95 per barrel, and 5.7% with oil prices at $120, it said.

“Our base case is 100bp cumulative hikes in 2022,” Rusike said.

The Bureau of Economic Research said that a 50bps hike should not be ruled out completely. “Outside of the rate call it will be interesting to see how the SARB sees the war in Ukraine influencing SA and the inflation trajectory going forward.”

The day before the SARB decision, Stats SA will release the February SA consumer inflation print, which the BER anticipates coming in at 5.7% y-o-y – unchanged from January.

The Bloomberg consensus is at 5.8% y-o-y, it said. President Cyril Ramaphosa is expected to address the nation soon to provide guidance on how the government is planning to manage regulations relating to Covid-19 once the state of disaster is lifted, which was once again extended by a month last week, to 15 April,” the BER said.

A forecast by 18 economists, academics, and property specialists, polled for’s repo rate forecast report, also finds that SARB’s Monetary Policy Committee is set to increase the repo rate at the March 24 meeting.

The majority of panellists expect the rate will increase by 25 basis points, while three say the rate will increase by 50 basis points.

Standard Bank SA head of economic research Elna Moolman and University of the Free State associate professor Johan Coetzee both think the rate will increase by 25 bps.

“The SARB wants to normalise interest rates after aggressive easing early during the pandemic and it wants to ensure that inflation expectations remain anchored despite sharp increases in food and fuel prices. However, it is also mindful of the fragility of the economic recovery,” Moolman said.

Coetzee added that the threat of war in a post-pandemic environment is likely to exacerbate inflation. “Besides supply-side pressures ramping up inflationary pressure, the Russia/Ukraine situation will undoubtedly speed up the rate at which it increases, especially driven by potentially record-high oil prices and a weaker currency,” he said.

Amid global economic uncertainty, three-quarters of the panellists predict the SARB will increase the rate at least two more times following the March decision, with 17% expecting as many as four increases after March.

However, the remaining 28% say the March hike will be the last for 2022 and 6% think the rate will increase just once more.

BNP Paribas chief economist Schultz said he expects four additional rate hikes after March. He said the SARB will “keep its foot on the hiking pedal throughout 2022 and H1 2023 as global supply-side inflation pressures look set to push inflation well above its 4.5% target midpoint”.

While the majority of panellists expect several rate hikes this year, it’s likely to be increased incrementally. The panel forecasts the repo rate will be at 5% by the end of 2022 – one percentage point higher than the current rate.



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