Global Courant 2023-05-22 11:56:30
South African households are facing another rate hike this week – and the numbers could turn out worse than initially expected.
The South African Reserve Bank (SARB) is holding its Monetary Policy Committee (MPC) meeting this week, with an announcement of expected interest rates on Thursday (May 25).
Markets have taken several blows in recent weeks amid intensified shutdowns and geopolitical missteps, which have put serious strain on the economy. According to the Bureau of Economic Research (BER), the central bank will now raise interest rates sooner than previously expected.
In March, the MPC surprised the market by raising rates by 50 basis points, pushing the repo rate to 7.75% and the prime lending rate to a 14-year high of 11.25%. At the time, analysts and economists expected an end to the hike cycle, with only a few expecting another 25 basis point hike in May.
However, given the current economic climate, the picture has shifted and is now more likely to rise another 50 basis points, the BER said. Even worse, more rate hikes could follow.
While a further deterioration in the power situation is undoubtedly bad for growth and would in itself argue against further domestic rate hikes, it is also inflationary, the economists said.
“This is because extended hours without power will increase operating costs as diesel generators take longer to run and waste increases.”
The BER noted that retailers have already sounded the alarm that any additional costs associated with even more intense power cuts should be passed on to the end consumer.
“In this sense, the energy crisis is increasingly a stagflation – lower growth, higher inflation – shock.”
The economists said the inflationary impact of the divestiture is exacerbated as power crisis concerns have arguably been a major factor in the recent crash of the rand.
Markets are in “raw panic” over a possible collapse of the South African power grid, despite efforts by the government and energy company Eskom to ensure such an event is unlikely. Intellidex analyst Peter Attard Montalto noted that, even if unlikely, the market demands proper contingency planning.
The rand has also been razed to the ground by allegations that South Africa sold arms to Russia. While these allegations – made by the US ambassador to South Africa – remain unsubstantiated, the government has launched an independent investigation into the matter.
Despite disputations to the contrary, South Africa is widely believed to have sided with Russia in the latter country’s invasion of Ukraine. The South African government insists it remains neutral, but Western countries and business leaders are not convinced.
The BER said that if continued, the weaker currency will have adverse price effects.
“Fortunately, in the very near term, the pass-through of the currency sell-off to domestic inflation is being mitigated by subdued, albeit rising, international oil prices last week,” it said.
“Still, given the SARB’s primary mandate of price stability, we believe that upside price risks from a more intense tax shedding, the recent sharp deterioration in SA’s risk premium and the concomitant decline in rand value will push the SARB MPC . to raise the repo rate by 50 basis points on Thursday,” it said.
Before the recent onslaught of currency weakness, the BER was expecting a 25 basis point increase, heralding the end of the tightening cycle. However, economists now say that the future of the walking cycle is more murky and indeterminate.
“Even if the MPC moves by 50 basis points on Thursday, it’s less clear now whether that will end the increases,” it said.
In addition to South Africa’s local problems, the edge and direction of interest rates also depend on the vagaries of the global economic environment – particularly moves by the US Federal Reserve.
Mixed comments from Fed policymakers over the past week have increased local uncertainty, the BER said.
“Even after 500 basis points of policy rate hikes by the Fed over the past year, some members of the Fed’s rate-setting committee (FOMC) questioned whether US policy rates were sufficiently restrictive to bring inflation back to the benchmark’s 2% target in time. fed.
“Our baseline view remains that the Fed is done walking, but the conviction is not particularly strong,” the economists said.
More rate hikes by the Fed would increase the risk that the SARB will also do more after this week and push domestic policy far into restrictive territory, potentially exaggerating the tightening.
That said, there was some support for our Fed call on Friday when Fed Chairman Jerome Powell said tighter credit standards in the US suggest the Fed may need to do less on policy rates to meet its 2% inflation target. to fetch.” said the BER.
On Thursday 25 May, the SARB MPC will announce its rate decision.
Read: There will be more pain for households in South Africa next week
