Analysts believe interest rate cycle nearing peak, with another 50 basis points hike expected this week

23 Jan 2023

Widely held expectations are that the South African Reserve Bank will increase the repo rate this Thursday by 50 basis points, with increases tapering off thereafter.

More than half (59%) of the panellists on the global financial platform Finder.com believe that Thursday will bring a 50 basis points (bps) increase, while 48% of the panel believe January is likely to be the peak of this interest rate cycle, with an additional 36% believing the rate will peak in March.

However, nearly one in five panellists (19%), including Morgan Stanley’s senior economist Andrea Masia, think the rate should hold. Masia is also part of the 19% who think the SA Reserve Bank raised the rate too aggressively in 2022.

“While risks of a final 50bps hike in the cycle are elevated, we think there is good reason to pause and assess the impact of historical tightening. A stronger FX and lower oil prices create the breathing room to do so,” he said.

Sanlam Investment Management’s head of fixed interest, Mokgatla Madisha, agrees the rate should hold but thinks the SA Reserve Bank will probably raise the rate by 50bps, given central banks are in policy tightening mode.

“Policy acts with a lag and we are yet to see the impact of last year’s rate hikes on the economy. Furthermore, inflation in SA has clearly peaked and with year-end forecasts of inflation close to 5%, the current repo rate of 7% is sufficiently restrictive,” said Madisha.

BNP Paribas chief economist Jeff Schultz disagrees. He thinks the SA Reserve Bank will and should increase the rate by 50bps on Thursday because of sticky inflation expectations, an arguably more vulnerable currency outlook and the fact that most disinflation is concentrated in fuel prices while core inflation will continue to climb.

“Though the decision is likely to be a close call … we think that persistently large uncertainties that remain on the domestic inflation outlook will sway the committee to buy itself a bit more insurance and hike 50bps,” he says.

Oxford Economics Africa senior economist Jee-A van der Linde is also backing a 50bps increase due to the uncertain inflation outlook as well as expectations that the Fed will increase the rate at its next meeting.

Van der Linde says slow disinflation dynamics imply that the SA Reserve Bank will consider lifting interest rates by another 50bps in the first quarter of this year, before pausing. “International oil prices have come down in recent months and the local currency has strengthened thanks to a softer US dollar.”

Visit Daily Maverick's home page for more news, analysis and investigations

The middle road

A third of the panel (33%), including Nedbank economist Liandra da Silva, think the SA Reserve Bank will take the middle road and are forecasting a 25bps increase.

“We expect the SA Reserve Bank to raise interest rates by 25 basis points at each of the first two meetings in 2023 following an aggressive policy-filled 2022. We expect inflation to fall within target in the first half of 2023, providing justification for a less aggressive policy path. However, should inflation prove stickier than expected, the SA Reserve Bank could remain hawkish and lift interest rates by higher than we expect.”

The majority of the panel (57%) think the rate will increase again in March, while 43% believe it will hold. However, homeowners may see some relief in the form of a decrease in the repo as soon as September, according to 17% of the panellists.

FNB chief economist Mamello Matikinca-Ngwenya points out that local price pressures have eased in the latest data. Producer inflation declined by a full percentage point to 15% in November, while December consumer inflation was 0.6ppt lower than the 7.8% peak recorded in July 2022.

“We expect inflation to continue slowing in 2023 as fuel and food price pressures fade. In fact, South Africa’s inflation is expected to draw closer to the 4.5% anchor by the second half of this year, reducing the need for further rate hikes. As usual, these factors will be vulnerable to global developments, which could adversely affect the inflation outlook,” she says.

Matikinca-Ngwenya adds that Nersa’s electricity price hike approval will probably translate to a higher contribution to CPI than what was assumed at the November Monetary Policy Committee (MPC) meeting, adding to the higher headline starting point.

“Further, the impact of load shedding should keep input costs elevated and threaten supply in some instances. After softening in the third quarter of last year, two-year-ahead inflation expectations lifted in the fourth quarter to settle 1.1ppt above the preferred anchor of 4.5%. This indicates that price-setters still see inflation remaining above target over the policy transmission horizon. We think the MPC will end its hiking cycle in January, delivering 50bps and leaving rates at a peak of 7.5%,” she says.

Jan-Daan van Wyk, a senior analyst at Stonehage Fleming, adds that the Sarb has hiked the repo rate seven times since the current hiking cycle started at the end of 2021, commencing earlier than most developed and emerging market peers, and front-loading much of its rate hiking. A cumulative 350 basis points increase has the repo rate at 7% currently, which is 50 basis points higher than immediately before the pandemic-related cuts started.

“While a single data point such as the BER Survey of Inflation Expectations in the fourth quarter of last year does not sway the MPC, it is unlikely to take comfort in inflation expectations drifting marginally higher versus the third quarter survey.

“Concurrently, while annual inflation did continue to moderate in December last year — registering 7.2% year over year (from 7.4% in November) — it remains above the 6% upper band of the MPC’s target range for headline inflation,” he says.

Van Wyk notes that the MPC has a long history of credibly combatting elevated and volatile inflation.

“Average annual inflation in South Africa since 2005 has been 5.5%. [The SA Reserve Bank’s] work has also historically prevented longer-run inflation expectations from becoming unanchored. Monetary policy actions this past year are but another example of how serious the MPC is about delivering on its mandate. We concur that should there be a hike [on Thursday], this increase is likely to be reversed over the next 12 months,” he concludes. DM/BM

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick

The middle road