The South African Reserve Bank (Sarb) will hike the repo rate for the last time in the current cycle on Thursday, then hit brakes.
But with the bank’s hiking cycle not expected to turn anytime soon, consumers can expect interest rates to remain at the current high level for some time.
That’s the expectation of most economists ahead of this week’s Sarb Monetary Policy Committee (MPC) meeting.
The majority forecast an increase of 25 basis points (bps) but say a bigger move of 50bps may be on the cards.
The Sarb’s hiking cycle has delivered a combined 425 bps increase in the repo rate since November 2021 in a massive upward swing from the pandemic lows of 3.5% in 2021. Its policy tightening action mirrored the moves of central banks across major economies as they staged a ferocious attack on stubbornly high inflation.
As the MPC reaches the end of its hiking spell a pause rather than a cut is necessary to allow the effects of the increases to start reflecting in the economy, says Chantal Marx, head of investment research and content at FNB Wealth and Investments.
Diving rand partly to blame
Marx, along with several other market analysts, projects that the Sarb will tighten interest rates further, albeit moderately, by announcing a 25bps increase on 25 May – the 10th consecutive hike in 18 months.
Miyelani Maluleke, an economist at Absa Corporate and Investment Banking, thinks the increase will be bigger at 50bps given the weakening of the rand in recent past weeks.
However, he also believes the next hike is likely to be the last in the cycle.
“We expect them to remain on hold until March next year. But it’s important to stress that the environment remains highly uncertain. What is clear is that the Sarb takes its fighting credentials very seriously so you cannot rule out further tightening if further upside risks to the inflation outlook manifest.”
And while Nedbank’s economic unit expects a 25bps raise, it’s not ruling out the possibility of a 50bps hike.
It lists among some of the risks that have worsened since Sarb’s last meeting in March surging food inflation and load shedding, with no relief in sight during the peak demand winter season.
The bank’s economists say a 25bps hike will be sufficient to tame inflation “given that domestic demand is faltering and pockets of financial strain are emerging among consumers”.
Lourens Pretorius, a fixed income portfolio manager at Matrix Fund Managers, says an increase of more than 25bps would be unsustainable, given South Africa’s low-growth environment that is also contending with high unemployment and worsening rolling power cuts.
“It’s not necessary to tighten much beyond 8%, I’ll be somewhat surprised if we were to get another 50 basis points clip this meeting, [and] I would be similarly surprised if they would keep interest rates unchanged.-moneyweb
