Have South African interest rates finally peaked? Experts weigh in - IOL

If conditions in the Middle East improve and oil prices fall sharply, the inflation outlook could improve more quickly than the SARB currently expects, opening the door to earlier cuts.

South Africans may have seen the last interest rate hike in the current cycle, with economists expecting rates to remain at current levels for some time before cuts become possible.

The South African Reserve Bank’s (SARB) Monetary Policy Committee unanimously increased the repo rate by 25 basis points to 7.25% on Wednesday, taking the prime lending rate to 10.75%.

While the increase was widely expected, PSG senior economist Johann Els says the unanimous decision was more hawkish than he had anticipated.

“I expected the decision to be close, with a strong case for a rate hike. However, the fact that it was unanimous was more hawkish than I expected,” he says.

Els says there were enough arguments for the MPC to leave rates unchanged, but the Bank’s concern that the global supply shock had persisted for long enough to push up inflation expectations ultimately won out.

Despite the unanimous vote, Els does not expect another increase under current conditions.

The SARB’s Quarterly Projection Model (QPM) also has no further increases in its base case, although Els cautions that the model should not be followed too literally as circumstances can change.

“For my own outlook, I think the fact that they hiked in May and have now hiked again in September, while acknowledging that monetary policy is already restrictive, means that there should be no further rate increases under current circumstances,” he says.

Standard Bank Group head of South Africa Macroeconomic Research Dr Elna Moolman agrees that rates may now have reached their peak.

“It is very possible that this could be the peak in the interest rate hiking cycle, and it could be that the Reserve Bank has scope late next year to start providing some interest rate relief,” she says.

However, Moolman says this will depend on the path of oil prices and whether higher transport costs begin feeding through into other prices.

Future Forex CEO Harry Scherzer similarly says the question is now whether Wednesday’s increase marks the peak of the tightening cycle. “Much will depend on the trajectory of inflation, oil prices, the rand and global interest rates in the months ahead,” he says.

Further increases have not been ruled out. Els says the SARB considered an alternative scenario in which global interest rates rise by more than assumed in its base case, resulting in another local rate hike and rates remaining higher for longer.

A second scenario, in which inflation expectations and wages increase, also results in another hike.

SARB is having to balance weak domestic growth against renewed external inflation risks.

The possibility of further tightening comes as the domestic economy remains under pressure.

Lara Hodes, economist at Investec, says consumer and business confidence remain subdued, while gross domestic product contracted in the second quarter. The SARB expects the economy to grow by 1.2% this year.

Els says the Bank sees the risks to economic growth as being to the downside, with the global environment having a greater effect on South Africa than previously expected.

Rhys Dyer, CEO of ooba Group, says the SARB is having to balance weak domestic growth against renewed external inflation risks. “SARB is navigating an increasingly difficult balance between subdued domestic growth and renewed external inflationary pressures,” Dyer says.

Els believes the weakness of the economy itself reduces the risk that inflation will become entrenched. He says the economy is not strong enough to generate demand-driven inflation or a significant second-round price impact, while supply-side shocks eventually weigh on demand and growth.

If conditions in the Middle East improve and oil prices fall sharply, the inflation outlook could improve more quickly than the SARB currently expects, opening the door to earlier cuts.

“In that scenario, I think rate cuts could also be brought forward more than currently expected,” Els says. “So, my expectation is no further rate increases after this one, under current circumstances.”