SA Reserve Bank to hike rates again this week to contain inflation, support rand

By Ed Stoddard

18 Sep 2022

The South African Reserve Bank (Sarb) is set to increase rates once again this week. The only question is by how much.

Domestic consumer inflation may or may not be peaking, but the South African Reserve Bank (Sarb) is not taking any chances. It’s a given that its Monetary Policy Committee (MPC) will increase rates again on Thursday when its bi-monthly meeting wraps up. The only question is by how much.

A poll by finder.com of 18 economists, academics and property specialists was unanimous in its view that the Sarb will raise rates on Thursday. Half of those polled see a 50 basis-point hike, 44% a 75 basis-point hike, with only one seeing a 25 basis-point move.

“Price stability remains the Sarb’s primary objective; policy will be forward-looking, and with increased pressure on the South African rand (ZAR) from accelerated DM [developed market] tightening, we expect the Sarb to deliver another 75 basis-point rate hike, as it did in July,” Razia Khan, the chief Africa economist at Standard Chartered Bank in London, said in a research note.

South African consumer inflation was running at 7.8% in July — a clear breach of the Sarb’s 3-6% target range — and is widely expected to race above 8%, though it remains to be seen whether it is peaking soon. Falling oil prices over the past couple of months will at least help to slow it down. The August CPI number will be released on Wednesday.

“With July CPI printing 7.8%, and likely to rise above 8.0% for the duration of this year, in our view; and with the repo rate currently at 5.5%, the Sarb may not want to risk policy becoming even more accommodative in real terms,” Khan said.

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One key concern for the Sarb is the rand, which is currently near over two-year lows above 17/$. The rand at the moment does not have a lot going for it. Aggressive interest rate hikes in developed economies to tame inflation are taking the shine off higher-yielding emerging market currencies, forcing central banks worldwide to follow suit.

Meanwhile, the prices of the mined commodities that South Africa exports have been cooling. One upshot of that was a current account surplus that unexpectedly slid into a deficit in the second quarter (Q2). Dividend outflows were also a major factor on this front and the stream offshore is expected to continue.

The bottom line is that South Africa is exporting more capital than it is importing at the moment, which is never good for the rand. Its lifeline of last resort is a credible, inflation-targeting central bank which does not hesitate to tighten or pursue “normalisation”, to use the jargon of the day. And the Sarb under no-nonsense Governor Lesetja Kganyago fits that bill.

The overall economic and business environment in South Africa remains bleak. Inflation has been driven by supply-side shocks such as the soaring fuel and food prices in the wake of Russia’s invasion of Ukraine. With an unemployment rate of almost 34% and an economy that contracted in the previous quarter — bringing output back to below pre-pandemic levels — it is hardly an ideal time to raise rates. Eskom’s rolling blackouts have just hit Stage 6 in spring, and the ruling ANC’s upcoming elective conference will largely determine who gets to eat the scraps that remain. Forget about the crafting of a coherent economic policy.

And yet the Sarb has hiked by 200 basis points since November last year, and may add another 75 basis points on Thursday. Who knows, it might just pull the trigger with 100 basis points. It would not be the first time the Sarb surprised the market. It may seem harsh, but it is probably the only medicine at the moment that can keep this economy out of intensive care. DM/BM

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