Economists are warning South Africans to brace for another substantial interest rate hike after the US Federal Reserve acted aggressively to combat inflation with its largest rate hike since 1994, amid mounting fears of an impending recession.
The steeper-than-expected hike confirmed the views of many economists that the Fed has had to catch up after acting too slowly to curb US inflation, which rose to 8.6% in May.
Pundits believe SA’s economy is cushioned to a degree from a US recession, in part because it acted early to contain higher inflation. But emerging-market currencies, including SA’s, are forecast to weaken.
The federal open market committee had been widely expected to hike interest rates by 50 basis points (bps) on Wednesday, but instead opted for a 75bps rise. The Bank of England (BoE) followed suit with a 25bps hike on Thursday.
The rand initially gained about 1.5% against the dollar, but after the BoE announcement, it had fallen 1.67% to R16.0432/$.
Anchor Capital co-investment officer Nolan Wapenaar said that while SA inflation was forecast to exceed the 3%-6% target band for a short period this year, “we are in a position where we can go a little bit slower on interest rate hikes”.
Wapenaar said SA did not have an inflation crisis in the way the US does and Wednesday’s hike was merely the Fed playing catch-up to what the markets had been calling for.
“We are cushioned because we didn’t let inflation get out of control before we acted, and therefore we don’t have to chase inflation,” said Wapenaar.
“SA is a commodity emerging market; our exports are tied to platinum, gold and coal ... SA is quite lucky, we are in the right place in the commodity cycle and that is giving us defence in this.”
The Reserve Bank’s monetary policy committee is due to meet on July 21, and economists expect the Fed’s decision could raise pressure for a second 50bps increase following the one last month.
Independent economist Sifiso Skenjana expects a 50bps hike and cautions that this would result in higher default ratios in a climate in which people are already struggling to pay off their debts. “We have got record high loan refusals and so everything is pointing to a negative economic context,” Skenjana said. But, recession is not an imminent risk in SA, he said.
University of Zululand economist and lecturer Sheunesu Zhou said a weaker rand could help to increase exports, but would put pressure on importers, who would find it more expensive to buy goods.
Fed chair Jerome Powell was at pains to tell journalists on Wednesday that the central bank did not want to see the US in a recession, but he also cautioned of another rate hike soon, indicating the Fed might consider a further 75bps increase at its next meeting.
Zhou said financial markets were expected to see a stabilisation of inflation, which could be a much-needed vote of confidence in the financial system.
“This should see financial markets stabilising,” he said, adding that the hike may result in the transfer of wealth from stock markets to bond markets as an increase in interest rates would decrease bond prices and subsequently lead to a rise in demand for bonds.
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