Warning over interest rates in South Africa – More Interest rate hikes

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The South African Reserve Bank (SARB) is likely to hike interest rates again in May, as inflation stays higher for longer than anticipated.

Economists at Nedbank said this week that the shock inflation figure for March 2023 would keep the South African Reserve Bank’s Monetary Policy Committee (MPC) in a hawkish mindset, which means further rate hikes are likely.

The central bank surprised markets with a 50 basis point hike in March, and is now expected to raise rates by a further 25 basis points in May.

Hiking rates again would rake the repo rate and prime lending rate to peaks of 8% and 11.50%, respectively, said Nedbank. The group noted, however, that this may very well be the peak of the rate cycle that started in November 2021.

Rates should be on hold for the rest of the year, it said, with the cycle starting to turn in early 2024.

Following its last MPC meeting, the SARB said that rate decisions will be guided by inflation levels in the country, with governor Lesetja Kganyago saying that it could not point to the top of the cycle because it doesn’t know where that is.

Consistent interest rate hikes have been the primary mechanism of managing both domestic and foreign inflationary pressures that are taking their toll on consumers across the country.

Despite the rate hike being long-winded, the central bank has reaffirmed its commitment to hiking rates until inflation is tamed between the target range of between 3% and 6%.

Nedbank said that inflation is likely to only recede slowly, with its forecast for CPI at an average of 6% from 5.8% previously. Other finance groups, like Standard Bank, have also adjusting their models for inflation to remain elevated for longer.

The latest headline consumer inflation data from Stats SA showed a slight increase to 7.1% in March from 7% in February – this was against many economists’ expectations that the rate would drop to 6.9%.

“The upward pressure continued to come mainly from ‘food and non-alcoholic beverages’, followed by ‘housing and utilities’, ‘transport’, and ‘miscellaneous goods and services’,” said Nedbank.

Despite the surprise climb in inflation, Kganyago said the SARB remains confident that inflation will still reach the target range(3% to 6%) by the final quarter of this year.

Best tool for the job?

While rate hikes are an effective blunt tool to curb inflation, they only work when directed at the source of inflationary pressure.

For South Africa, they are proving ineffective as inflationary pressure – particularly for food prices – is rooted in many sources, including currency weakness and local power outages.

Meanwhile, the higher rates are adding even more pressure to households, who now have to contend with higher prices and higher debt repayments.

Lugi Marinus, a portfolio manager at PPS Investments, said that although there was a small increase in inflation in March, there is growing worry over the effect of the 425 basis point hike in rates, which have still not had the desired effect of weakening inflation.

The latest hike from SARB was a surprising 50 basis points, throwing analysts’ expectations for a cooling off of rates out the window. Marinus said that the 50 basis point hike was a signal from SARB that the country may not have reached the end of the rate hike cycle.

Adriaan Pask, the CIO at PSG Wealth, said that higher inflation expectations and depreciating currencies reinforce the pressing need for central banks to accelerate the normalisation of their policy rates, tightening global financial conditions.

Inflation expectation

Addressing inflation more broadly, Nedbank echoed the sentiments of the SARB, forecasting inflation to trend lower off a higher base in the second half of the year.

The bank said that lower fuel prices would be the main drag as they benefit from subdued crude oil prices, which are projected to remain below $100 per barrel due to weaker global demand.

Food inflation, on the other hand, remains sticky, it said.

Despite this, the group noted that it is probably near its peak and it should begin to trend down during the second quarter of this year – reflecting the lagged effect of the moderation in global food prices and favourable weather conditions.

Risk remain, however.

Inflation could recede at a slow pace, the bank said, and the price of Brent crude oil could edge higher after oil producing nations announced further production cuts in May.

“Meanwhile, the rand remains under pressure from the volatile global risk sentiment, further hikes in US interest rates and domestic factors, primarily power shortages and political noises ahead of the 2024 election”,” reported the bank.

It added that input costs are likely to rise as power generation from diesel amid persistent load-shedding forces producers to pass the cost pressures onto consumers.

The next release date for CPI data is scheduled for Wednesday, 24 May 2023

Source: https://businesstech.co.za/news/finance/682239/warning-over-interest-rates-in-south-africa/

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