The SA Reserve Bank is likely to raise interest rates by the biggest margin in more than five years on Thursday, economists say, a decision that would confirm the Bank’s hawkish stance on inflation as spiralling fuel and food costs push consumer prices closer to the upper end of its target range.
The Bank, which started a three-day monetary policy meeting on Tuesday is forecast to raise its benchmark repo rate by 50 basis points to 4.75% to keep up with what is now a faster pace of monetary policy normalisation around the world in an attempt to stem capital outflows and ensure foreign participation in the local bond markets.
Consumer inflation is already in touching distance of the upper end of the Reserve Bank’s 3%-6% target range, which policymakers have said they expect to be breached during 2022, before returning towards the midpoint in 2023.
Moody’s forecasts SA inflation will rise to around 8% this year, higher than Investec’s 6.3% average and the 6.2% market consensus.
Thalia Petousis, portfolio manager at Allan Gray told Business Day that SA faces “dangers in falling far behind” if the Bank’s Monetary Policy Committee (MPC) doesn’t increase rates by 50 bps.
Nedbank said it also expects a 50 bps hike with the increased likelihood of a further such increase in July, followed by 25 bps in each of the remaining meetings this year.
Sixteen of 24 economists surveyed by Reuters expect an increase of 50 bps. The last time the Bank lifted rates by that amount was in January 2016.
SA’s producer price index, which measures changes in the prices of goods bought and sold by manufacturers, climbed 11.9% in March, raising the risk of greater second-round effects via a partial pass-through to the Consumer Price Index as well as rising inflation expectations of businesses.
The rand’s recent sharp declines have added further pressure to hike rates. The unit declined for the fifth successive week as general risk-off sentiment dominated markets amid tighter global monetary policies and concern over global stagflation.
The rand is much weaker than the starting point of R15.40 assumed in the Bank’s quarterly projection model at the last MPC meeting, making its current weakness a major risk to domestic inflation forecasts.
Higher-than-expected US inflation figures — at 8.3% in the latest publication of the data — have seen calls for even more aggressive action from the Federal Reserve, which recently raised its lending rate by 50 bps to a range of 0.75%-1%, its biggest increase in more than two decades.
But raising rates too aggressively may hamper domestic recovery as growth concerns increase, both from the external environment and domestically. The slowdown in China will also have a knock on effect for local GDP. Moreover, devastating floods in parts of KwaZulu-Natal and the latest bouts of load-shedding will be reflected in the second quarter.
Isaah Mhlanga, executive chief economist at Alexforbes told Business Day the Reserve Bank faces two paths: hiking interest rates aggressively to tame inflation while risking a significant slowdown in economic growth, or tolerating marginally higher inflation than the midpoint for longer and increasing borrowing costs more moderately.
Mhlanga said the Bank is likely to follow the moderate path given that local inflation dynamics are more muted than developed economies, high unemployment, and weak economic growth.
“How fast and aggressive the US Fed and other major central banks hike their interest rates will be the key determinant on shifting the SARB to a more aggressive path,” Mhlanga said.
A 50 bps rate hike could also stiffen the resolve of workers to demand above-inflation wage increases, as has been seen in the pay increase demands of between 10% and 12% from workers at Eskom, the SA Revenue Service and other government departments.
Itumeleng Molatlhegi, Cosatu’s chief negotiator at the Public Service Co-ordinating Bargaining Council said a 50 bps hike would make a strong case for wage increases above 10%. He said the unions were against any rate increases.
“This means we need to fight for more increases — and not only on cost of living adjustments but also on housing, medical aid, petrol, transport and municipal utilities,” Molatlhegi said.
“When we engage the employer, this is the reality we will put in front of them. It means the workers are worse off since we put forward our demands. We need to fight for more increases.”
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