The Reserve Bank could hike interest rates by 25 basis points next month in its final policy meeting for the year before embarking on a cutting cycle, BMI, a subsidiary of FitchSolutions, said on Thursday.
It pointed to early signs of building inflationary pressures sparked in part by the resurgent increase in international oil prices while the rand was wobbly against the dollar.
“It’s going to be a close call given the economic realities currently at play, but we are leaning more towards the view that the Bank will likely implement a modest hike,” said Chiedza Madzima, its head of global operation risk research.
The global environment has become more uncertain, putting policymakers in a bind as they strike a fine balance between pre-empting higher inflation and inflation expectations becoming entrenched and the potential risks of overtightening.
The local central bank has elicited a fair amount of criticism in its hiking campaign to guide inflation back to the midpoint of the 3%-6% target band on a sustainable basis.
That target is projected to be achieved in 2025 when average inflation will dip to 4.5%.
But those projections are not set in stone and could be revised as appropriate in line with changing global dynamics.
Oil markets remain sensitive to the geopolitical conflict in the Middle East, with Brent crude close to $90 a barrel, the highest level in about a year. The El Niño phenomenon of dry and hot weather on the horizon is another wild card that could keep food inflation elevated.
But above all else, it is the direction of the US interest rates which mainly drive capital flows that could change the monetary outlook in SA.
Madzima said consumers and businesses will probably get some relief in 2024 with the Bank likely to cut rates by a cumulative 100 basis points.
‘The dovish stance taken by the US Fed[eral Reserve] and European Central Bank to loosen their monetary policies gives [the Bank] additional room to embark on its own loosing cycle,” Madzima said, adding the policy pivot will be shallower than previously anticipated because of sticky inflation.
Bank governor Lesetja Kganyago has said rates are already in restrictive territory, meaning any further tightening runs the risk of putting leveraged consumers and businesses under more pressure. However, people with savings accounts benefit from the tighter policy environment. The local central bank has hiked rates by a cumulative 475 basis points to 8.25% since November 2021.
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