Another week, another rate decision. The SA Reserve Bank is due to announce its interest rate decision on Thursday, and I would be neither surprised nor disapproving if the Bank decides to hike the repo rate, yet again.
If the monetary policy committee (MPC) raises the repo rate, it would be the 11th time in 18 months. The Bank has raised rates by 475 basis points (bps) since November 2021. Rates were at a historic 3.5% before tightening began.
It is not surprising, therefore, that South Africans are protesting and questions are being asked about the appropriateness of the Bank’s actions. The monthly repayment on a R1m bond is about R3,000 higher than it was before the tightening, an increase of 40%.
This escalation in debt service costs is happening in an environment when growth is slowing and inflation is high, and consumer and business confidence are in the doldrums. The question that is asked often is what purpose rate hikes will serve. Unfortunately, it was always going to come to this.
The central bank had no choice but to raise rates, and will have to remain hawkish for a while longer. For one, market-determined bond rates, while lower than where they got in May, still remain higher than where the repo rate is. As long as the yield curve remains steep, the pressure on the Bank remains.
Some argue that the Bank controls yields across the curve. But this is false. The market determines long bond yields, and the MPC has to at least partially follow these market-determined rates.
How much the government borrows is a much more important determinant of where yields end up. If the Bank fails to raise rates to a level that matches that suggested by bonds, the currency will depreciate, and inflation and inflation expectations will move higher. If the Bank is seen as nonresponsive to this interest rate reset, the back end of the curve will continue to rise until the repo rate rises to the “correct” level. This is the dynamic that has been at play in the market and to which it has had to respond.
Looking forward, what the Bank does will be heavily influenced by what other central banks are doing. While inflation is decelerating in the rest of the world, most central banks are not really easing in response. If the MPC were to stop hiking, the relative rates in SA would drop, and this risks putting pressure on the rand. Meanwhile, the domestic economy is not growing fast enough yet to attract investments in the absence of competitive rates.
Members of the US federal open market committee (FOMC) say they will raise rates twice more, by 50bps, and the speed of the US economy suggests the FOMC could yet do so if it wants to curb inflation over the medium term. The pressure to on local policymakers will remain.
While improving, the SA inflation outlook offers only a little encouragement. Inflation is expected to reach the Bank’s 4.5% target only in 2025, and inflation expectations have been revised higher since the MPC’s meeting in May.
Meanwhile, China’s growth is softening and risks of recession in the US remain elevated. If these two engines of the global economy falter, the rand will come under pressure again. SA’s central bank will be wary of a financial market rout with rates that are perceived to be too low.
The MPC will go into Thursday’s meeting cautious for the reasons that I have outlined above. There is thus a material probability that the Bank will hike, if only to shore up credibility, which is sorely needed now. Protest at too hawkish a stance is bound to increase as the year progresses. Even then, the Bank will and should continue to act in a way that supports macroeconomic balance. This could very well mean we see rates rise again.
• Lijane is global markets strategist at Standard Bank CIB.
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