The Reserve Bank’s monetary policy committee meets this week and it will surely be hoping that the response to its interest rate decision is more predictable than the last time.
In May’s volatile markets, the committee’s higher-than-expected hike of 50 basis points (bps) prompted a shock depreciation in the rand — quite the opposite of the appreciation that might have been expected. It’s still not clear if it was because the markets wanted even more of a hike or that they read the Bank’s move as such a gloomy signal.
Markets are a lot calmer now. The rand is considerably stronger. It’s trading at about R18.11 to the dollar, whereas at the time of the previous meeting the Bank’s implied starting point for the exchange rate was R18.68.
Inflation is looking somewhat better, too. It came in at a lower-than-expected 6.3% for May, the lowest for more than a year. A big driver has been food price inflation. This is slowing down at last, even if it’s still high at 12% year on year. Fuel prices are coming down too.
By the time the June consumer price index (CPI) is published on Wednesday, the committee will usually have made its decision already. But economists expect June’s inflation to come down to just within the inflation target range at 5.9% — which is now also expected to be the average for 2023 as a whole. That’s well below the 6.3% average the Bank was forecasting at the time of the May meeting.
That could provide space for the committee to pause on rate hikes this week — as the US Federal Reserve did in June, as it waited to see the effect of the rate hikes it had already implemented. Here in SA, the Bank has hiked rates by a cumulative 475 bps to 8.25% since it started to tighten in November 2021. That’s pretty steep even if not as steep as some of SA’s emerging-market peers.
Rates start to bite
Trading statements recently from some of SA’s big banks show the rate hikes are definitely starting to bite, with bad debts climbing. That’s not too surprising. Governor Lesetja Kganyago said at the May meeting that interest rates were now for the first time at a level that could be deemed “restrictive”.
All which indicates that the Bank could be reaching the end of the interest rate tightening cycle. But are we there yet? That’s the big debate in SA as it is globally. And the question is not just whether interest rates have reached the top, but also how long they will stay high before the easing cycle starts.
Most economists expect the Fed will be able to start cutting only in 2024, possibly even only in the second half, and there may still be one or two more hikes in the US. Emerging-market central banks, including SA, starting hiking rates earlier than the Fed and other advanced-economy central banks, and so most now have a better handle on inflation and are close to the end of their hiking cycles. But S&P Global’s economists made the point last week that emerging markets may have to wait for the Fed to start cutting before they take the risk of easing rates.
Emerging-market currencies and capital flows are still vulnerable to the vagaries of the Fed and that is something SA’s monetary policymakers will be closely watching as a risk to inflation. They will also be closely monitoring inflation expectations in SA, which have risen and pose a risk to prices and wages, even though a very weak economy will constrain pricing power. SA’s weakening fiscal position is another risk, because it’s likely to keep the country risk premium high and that means market interest rates could stay high, even though inflation is coming down.
Kganyago has warned that the Bank will not start cutting until it is confident that inflation is heading down towards the 4.5% midpoint of the target range. The committee will update its forecasts this week and the outlook should be better. The majority of the 21 economists polled by Thomson Reuters expect the committee to pause on rates. But this is clearly not guaranteed. Nine economists expect a 25 bps hike.
The committee was unanimous in its decision last time, but there clearly will be robust debate this time. And even if it holds, this may not be the last hike and we can expect rates to stay high for a while.
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