Global Courant
South African debt holders should expect another rate hike this month as economists and analysts remain divided and the Reserve Bank remains cautious on the way forward.
According to economists at the Bureau of Economic Research (BER), despite a rate-fixing in the United States by the Fed, a 25 basis point hike is expected for the US later this month, indicating that the battle against high levels of inflation is still ongoing.
Elsewhere in the world, central banks have also continued on their path, with the latest increase coming from Sweden’s central bank, which raised its key rate by 25 basis points late last week.
“The bank warned that at least one more increase would be needed this year. An aggressive tone was also noticeable in other parts of Europe,” the BER said.
“At the annual conference of the European Central Bank, the heads of the central banks of developed economies warned that interest rates should remain high. While headline inflation continues to moderate in most economies, tight labor markets are driving up prices and keeping core inflation uncomfortably high.
Sweden’s move follows similar increases by the central banks of England, Norway, Switzerland and Turkey.
With global central banks still in a tight grip on the cycle, this is likely to spill over into South Africa, which also has its own quirks – such as tax shedding, crumbling infrastructure, blocked ports etc – to deal with .
Last week, SARB Governor Lesetja Kganyago signaled the same, while the central bank gave no indication – one way or another – where the next rate hike will go, only to say that current restrictive levels will last longer.
“The SARB’s position, in line with other central banks, is that policy rates will have to remain restrictive for longer to bring inflation down,” the BER said.
In an interview with Bloomberg TV on Wednesday, Kganyago said it was too early to say whether the bank would pause its rate hike cycle, as the US Federal Reserve (Fed) did in June.
“There is no question that policy will have to stay tight a little longer than the market actually priced in,” Kganyago said.
“And the reason is that inflation is more stubborn than we actually thought.”
Inflation in May slowed more than expected to a 13-month low of 6.3%. Yet inflation has been above the South African Reserve Bank’s target range for a year now.
As a result of the uncertainty, local economists are divided. Some see a hold on local rates, while others expect a 25 basis point increase.
The SARB has raised rates in 10 consecutive meetings so far, adding 475 basis points to the cycle from November 2021.
After the better-than-expected May inflation numbers, analysts were more confident that the Reserve Bank would pause rate hikes at its next meeting in July.
However, not everyone is equally optimistic. Economists have noticed the SARB’s aggressive tone, saying the central bank is likely to hold out rate hikes for at least one more meeting — likely another 25 basis point hike in July.
The SARB’s Monetary Policy Committee (MPC) will announce its next rate decision on July 20.
Read: How much more you will pay on your monthly bond if interest rates rise again in July
