Money’s on a rate hike this week as oil prices and Fed move pile pressure on SARB - IOL

South African Reserve Bank Governor Governor Lesetja Kganyago will announce the interest rate decision on Wednesday.

South Africans could face another interest rate hike on Wednesday, with financial markets heavily betting on an increase as rising oil prices and the US Federal Reserve’s latest move add to inflation concerns.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) will announce its latest interest rate decision on Wednesday, with the odds increasingly pointing towards a 25 basis-point hike.

Investec chief economist Annabel Bishop said financial markets had already been pricing in a near 85% chance of a 25 basis-point increase, with a second hike fully factored in by the end of the year.

That would take the repo rate from 7% to 7.25% and prime from 10.5% to 10.75%.

Bishop said last week that the US Federal Reserve's decision to raise its target range by 25 basis points to between 3.75% and 4% had increased the chances of the SARB following suit.

“For South Africa, the outcome bolsters the chance of an interest rate hike at next week's Monetary Policy Committee meeting,” she said.

Investec economist Lara Hodes also expects the SARB to increase rates, despite forecasting that August inflation will come in at a relatively contained 4.5% year-on-year and 0.1% month-on-month.

The August petrol price fell by 52 cents a litre, limiting pressure from transport, while inflation in food and non-alcoholic beverages is expected to have remained contained after easing further in July.

Hodes said meat prices had softened considerably, while cereal products had benefited from favourable harvests.

However, the outlook has become less benign since then.

Brent crude has climbed above $106 a barrel amid escalating global tensions, increasing the risk of renewed inflationary pressure, while the Fed's decision has added another consideration for the MPC, said Hodes.

Trading Economics said expectations of a hike increased after the Fed's move because a narrower interest-rate differential could put pressure on the rand and, in turn, add to inflation.

It nevertheless described Wednesday's decision as uncertain.

Inflation has been trending higher, apart from a dip in July following fuel-price cuts, while the South African economy contracted in the second quarter. At the same time, inflation expectations fell during the third quarter, potentially reducing the need for higher rates.

PSG Financial Services senior economist Johann Els still expects the MPC to leave rates unchanged.

Els’ view is partly based on the latest Bureau for Economic Research inflation expectations survey, which showed expectations stabilising or falling across several measures.

Households' expectations for inflation over the next year fell from 6% to 4.9%, while their five-year expectation declined from 9.1% to 8.3%. The BER's overall measure of professional five-year inflation expectations eased from 4.1% to 4.0% in the third quarter.

Analysts expect inflation of 3.4% in 2028 and 3.5% over five years. Trade unions' expectations are higher but falling, at 4.1% for 2027, 3.9% for 2028 and 4.3% over five years.

Els said last week the Fed's decision had shifted the balance somewhat, but he nevertheless expected the SARB to hold rates steady.

The MPC will announce its decision at 3pm on Wednesday.