The Reserve Bank is expected to raise interest rates for a fifth successive monetary policy committee (MPC) meeting as it moves to curb accelerating inflation and protect the weakened rand.
The committee is expected to increase rates by 50 basis points (bps) on Thursday at the end of its three-day meeting which starts on Tuesday. This will come after May’s 50 bps hike, making these the two largest successive increases in more than five years.
Of 23 economists surveyed by Thomson Reuters Econometer, four said they expected a more aggressive hike of 75 basis points. Consensus is another 50 bps rate hike in September ending the year at 5.75%
The meeting comes against the backdrop of elevated inflationary pressures resulting from geopolitical tension and the risk that comes with domestic wage demands.
The rand fell sharply against the US dollar, reaching its lowest level since August 2020.
Higher than expected inflation figures in the US strengthened expectations of the US Federal Reserve acting more aggressively, with forecasts of a hike ranging from 75 bps and 100 bps at its next meeting.
The rand lost a further 1.4% against the dollar and ended the week 0.5% weaker against the euro.
Markets priced in more aggressive rate hikes than economist consensus. Absa chief economist Peter Worthington said the Forward Rate Agreement, now at 7.95%, implies about 300 bps of monetary policy tightening over the next year — 50 bps increases over the next six meetings.
Target range
The sustained upside breach of the Bank’s target range for consumer inflation and the rise in inflation expectations will be of particular concern for the MPC.
Since the January MPC meeting, the SARB has raised its inflation forecast by a full percentage point, from 4.9% to 5.9% in May and will probably raise the forecast further after the upside surprise in the latest CPI data.
Inflation accelerated faster than consensus expectations, indicating that SA has not bucked the trend of upside inflation surprises that other countries, such as the US, have experienced.
This has resulted broadly in a lifting of inflation forecasts for this year. Consensus expectations have risen from 5.9% before the May CPI data to 6.2% now. FNB’s forecast was revised up to 7.2% and Investec’s up to 7.3%.
The Bank’s decision will also be affected by trade unions making above-inflation wage demands.
SARS closed some of its branches last week due to renewed strike action as talks with the Public Servants Association (PSA) and the National Education, Health and Allied Workers’ Union (Nehawu) broke down.
Both unions demand above-inflation increase; The PSA wants 11.5% and Nehawu 12%, while the National Union of Metalworkers of SA has called for a 20% increase in the automotive sector. The PSA is also moving closer to initiating industrial action against government after public-sector wage talks stalled.
Old Mutual Investment Group chief economist Johann Els told Business Day the Bank will weigh the opposing forces in the inflation picture — the weaker rand and softer commodity prices — and probably discuss hiking by “either 50 bps or 75 bps”.
Load-shedding
Sanlam Investments chief economist Arthur Kamp said the Bank is not likely to be deterred by growth forecasts being revised lower due to the KwaZulu-Natal floods and electricity load-shedding which will result in a material contraction in real GDP in the second quarter of 2022.
Kamp said that even though global recession worries have surfaced making the outlook for commodity prices and domestic GDP growth murky heading into 2023, the Bank will focus on its primary mandate and front-load interest rate hikes to contain inflation expectations “not least because domestic inflation forecasts are being revised up. Reflecting the jump in petrol prices, the annual advance in headline CPI likely breached 7% in June 2022, which is a long way from the Reserve Bank’s effective inflation target of 4.5%.”
Bureau for Economic Research chief economist Hugo Pienaar said these are examples of the much lamented “second-round” effects of higher inflation and very much what the Reserve Bank wants to avoid as it could entrench the trend of higher inflation.
“The implications of recent above-inflation wage demands and the results of the latest second half 2022 BER inflation expectations survey are likely to be some of the points of debate when the MPC meets from tomorrow to deliberate on the next policy interest rate decision,” Pienaar said.
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