Global Courant 2023-05-29 12:24:45
Economists and analysts have had time to digest the latest rate hike from the South African Reserve Bank and talk to the central bank about its decision.
The SARB’s Monetary Policy Committee (MPC) voted unanimously last week to raise interest rates by 50 basis points, bringing the repo rate to 8.25% and the prime lending rate to 11.75%.
While the rate hike was not unexpected, the market’s reaction to the move was surprising, sending the rand into a free-fall and pushing it to its weakest point against the US dollar on record.
According to the Bureau of Economic Research (BER), this reaction appeared to be rooted in the fact that the rate hike came in lower than the market had expected, with investors expecting a 75 bps hike (versus the 25/50 bps hike analysts predicted). expected) .
However, subsequent engagements with the SARB revealed that much of the selloff was also related to comments from the SARB that it expects the rand to weaken further in the coming months.
The BER said this was an “overreaction” by the market to the commentary, which the SARB later clarified was a risk assessment, not a baseline expectation. The central bank expects the rand to strengthen against the dollar in the long term.
“Markets seemed to have overreacted to comments in the SARB statement accompanying the interest rate decision that ‘further rim weakness’ was likely.
“During an investor feedback session with the SARB MPC on Friday, it was stressed that this comment was intended as a risk statement and not a baseline expectation that the rand would weaken further,” the BER said.
The BER noted that the MPC often cites the rand as one of the top upside risks to its inflation forecast. The deterioration in the SARB’s medium-term outlook for the current account may also have contributed to dejected sentiment towards the rand, it said.
“The sharp depreciation of the rand exchange rate in recent weeks and the possible inflationary implications of a weaker currency would undoubtedly have influenced the MPC’s deliberations. As such, the SARB’s forecasts for aggregate and core CPI in 2023 and 2024 were revised upwards.
“Besides further edge weakness, other upside risks listed by the SARB include higher-than-expected oil prices, salary increases and costs associated with shedding charges that are passed through in the form of higher retail prices.”
All of these risk factors will factor into the SARB’s decision on future interest rate moves or holdings.
This was echoed by economists at Nedbank. The financial group said that with inflation well outside the Reserve Bank’s target of 4.5% – and while inflation expectations continue to rise – the interest rate outlook still faces upside risks.
“Upside risks signaled by the MPC remained unchanged, including still sticky global inflation, expectations of tighter global oil markets, higher domestic electricity rates and other administrative prices, higher wage demands and increased domestic food inflation, threatened by rising production costs due to severe load loss and the risk of drier weather conditions in the coming planting season,” said the bank.
While the Reserve Bank believes it has only now entered restrictive territory with rates, Nedbank said the environment has been restrictive since January. As such, it does not think the central bank will raise rates again and remain at current levels for the rest of the year.
But this comes with some caveats.
“With the rand vulnerable amid growing negative sentiment towards South Africa, our interest rate forecasts are still at significant upside risk,” the bank said.
According to Annabel Bishop, Investec’s chief economist, these risks are known to the central bank.
“On the domestic front, the economic environment remains very fragile. The country’s electricity supply situation is dire, with ongoing load shedding affecting all sectors of the economy,
declining confidence.
“Indeed, the SARB expects the divestiture alone to deduct two percentage points from growth this year,” she said.
“The SARB estimates that risks to the medium-term domestic growth outlook are balanced; however, it reiterated that both domestic and global growth prospects remain highly sensitive to new shocks.”
The next interest rate announcement is scheduled for 20 July 2023.
Read: South African ‘fundamentals’ drive investors away
