Efficient Group economist Dr Francois Stofberg says the tightening global economy is likely to result in more rate hikes for South Africa – although the central bank (SARB) is unlikely to exceed 50 basis points this year.
In a note this week, Stofberg said a strong June jobs report in the United States (US) would likely put the Federal Reserve (Fed) on track to cool interest rates to a 22-year high at their next meeting. economy and fighting inflation.
“As the outlook for above-target inflation and a stronger-than-expected (US) labor market persists, more restrictive monetary policy will be needed for an extended period of time. As a result, many emerging markets and their currencies took a beating,” he said.
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Locally, the South African stock market contracted 2.4% when the news broke, and the rand depreciated more than 2% to levels above R19.10 against the US dollar. Although the market has since eased – with the rand back to around R18.40 per dollar – markets continue to move.
“Tighter monetary policy in the US is also likely to translate into more rate hikes in South Africa,” Stofberg noted.
“The South African Reserve Bank has shown unequivocally that inflation is their main concern and that they care little about consumers or the wider economy. Although we doubt that the SARB will have to raise interest rates by more than 0.5% (50bp) in 2023.”
Nedbank economist Johannes Khosa also believes more rate hikes are coming, with the group bidding another 25 basis points hike, likely at its July meeting.
The Reserve Bank’s Monetary Policy Committee (MPC) raised interest rates by another 50 basis points in May, bringing repo and prime rates to 8.25% and 11.75% respectively.
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“The aggressive stance was mainly driven by the poor inflation outlook and high inflation expectations,” he said.
Since then, inflation expectations have continued to rise, with the latest research from the Bureau of Economic Research (BER) pointing to higher expectations from companies, analysts and unions.
Nedbank noted that the SARB continues to see upside risks to inflation stemming from continued global inflation, expectations of tighter global oil markets and a fragile rim.
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“Given volatile global risk sentiment amid slowing global growth and the threat of further rate hikes in the US, the risk of another bout of severe peripheral weakness remains high,” Khosa said.
“Other risks include higher domestic electricity rates and other administrative prices.”
The outlook for domestic food inflation also remains uncertain, threatened by rising production costs due to severe load shedding and the risk of drier weather conditions in the coming planting season.
“Higher cost of living could also fuel another round of higher wage settlements, despite lower labor productivity,” he said.
Nedbank noted that while better-than-expected inflation results in May are encouraging, suggesting that inflation could return to the SARB’s target range sooner than expected, the MPC is likely to remain cautious.
“As a result, the SARB is forecast to raise rates another 25 basis points in July, pushing the repo and prime lending rates to peaks of 8.5% and 12%, respectively,” Khosa said.
According to Nedbank projections, monetary easing cannot be expected until early 2024, with the MPC set to cut rates by 100 basis points by the end of the year.
Read: Brace yourself for more interest pain