Bank of America (BofA) says the SA Reserve Bank will hike rates at its November meeting, citing a weakening in the near-term inflation outlook from new risks including higher oil prices, an outbreak of bird flu and rand volatility.
The warning comes a week ahead of the release of the Bank’s Monetary Policy Review.
BofA senior economist Tatonga Rusike said the BofA is now calling for 25 basis point hike in November, taking the policy rate to 8.5%, and thereafter remaining flat until the end of the first half of 2024.
“We are making a new call, we now think the Bank is likely to hike at the November MPC [monetary policy committee meeting],” Rusike said.
“A combination of rising oil prices, a higher-for-longer rates narrative and fiscal risks in emerging markets are likely to weaken emerging market currencies further, and a stronger dollar should continue to weaken the rand, in our view.”
The release of the Monetary Policy Review next Tuesday comes as inflation risks have increased even more than when the Bank released its monetary policy statement in September.
Rising oil prices have reignited the risk of higher inflation in SA.
Rusike said following the increase in international oil prices, local fuel prices increased month on month by 7.5% and 4.7% in September and October, respectively.
He said BofA now estimates headline inflation reaching 5.2% in September, 5.7% in October, and averaging 5.6% in the fourth quarter. Inflation of 5.5% is expected at year-end compared with 5% in their previous baseline associated with a dovish outlook for monetary policy.
“The oil supply shock is negative for emerging market currencies, including the rand, because the dollar is likely to remain strong till year-end. The dollar-rand exchange is likely to be weaker to year end, at R19 per USD compared to our previous estimate of 18.5,” Rusike said. “We maintain our view that dollar weakness will bring rand strength into 2024.”
He said BofA holds its “constructive view” on the rand further into 2024, driven principally by its expectation of dollar weakness as the Federal Reserve stops hiking in November 2023 and pivots towards cutting in mid-2024.
“A dovish Fed and global central banks generally support a weaker dollar and favour emerging market currencies including the rand. We now forecast USD/ZAR at 18 in mid-2024,” he said.
Rusike said BofA’s US economics team views the surge in energy prices as unlikely to move the needle on rate hikes as long as inflation in the rest of the consumer basket moves in the right direction. The risk is that persistently higher energy prices negatively impact inflation expectations and the Fed stays higher for longer, he said.
“The Fed is likely to hike 25 basis points one last time in November, for a terminal Fed funds rate of 5.5-5.75%. Our economists also believe the Fed will deliver 75 basis points of cuts next year, starting in June 2024 and proceeding at a quarterly pace.”
He said emerging market currencies are still pricing a narrow soft-landing path. However, a combination of rising oil prices, a higher-for-longer rates narrative and fiscal risks in emerging markets are likely to weaken emerging market currencies further.
“The rand is closely correlated with the broader dollar and emerging market currencies hence the stronger dollar should continue to weaken the rand, in our view,” he said. “We prefer to express our bearish view on the rand against the euro in order to diversify our longs away from the dollar and because the entry point looks attractive for euro/rand.”
Other factors that could push the October inflation print close to the 6% upper end of the inflation target include the bird flu outbreak that is causing shortages of poultry products — chickens and eggs — that could push up poultry prices.
“We estimate food prices could increase by close to 2% month on month in October,” he said.
He added that delayed rains could result in lower harvests around March/April 2024, pushing food prices higher, and that medical inflation is likely also to spike in January 2024, causing an overall increase in CPI year on year.
“Usually, medical insurers raise prices in February, but they have moved 2024 price adjustments a month earlier.”
He said various medical insurers have announced average increases of about 7%, starting in January. For instance, medical schemes weighted average increases are 7.5% for Discovery Health, 6.9% for Bonitas and 6.9% for Momentum Health, among other health insurance providers, he said.
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