The South African Reserve Bank(SARB) is expected to keep interest rates where they are, but there is still a risk that they could rise.
Investec Chief Economist Annabel Bishop said that there is a risk that the SARB’s Monetary Policy Committee (MPC) hike rates by 25 basis points, especially after the US Fed raised its interest rates by 25 basis points at its last meeting.
“Lowering the difference between SA and US interest rates (narrowing the interest rate differential) weakens the rand, which in turn places upwards pressure on inflation. Foreigners have been net sellers of SA bonds most of this year, and particularly of SA equities,” Bishop said.
Interest rates in South Africa have remained unchanged since May, but the US hiked rates by 25 basis points in both May and July, raising its Bank rate by 5.25% in total compared to South Africa’s 4.75%.
Although this would indicate that there is room for further interest rate hikes of up to 50 basis points, inflation has dropped significantly over recent months.
Despite ticking up from 4.7% in July to 4.8% in August, headline inflation has dropped significantly since the 7.2% reading in December.
Bishop noted that inflation will likely average close to 4.5% next year, meaning that no interest rate hike will be needed to get inflation under control.
That said, she noted that there is still an upside risk to inflation as drier conditions from the El Nino weather pattern could impact food prices – but it is still too early to predict its extent.
In addition, although an interest rate hike would lower the differential between the US and South African interest rates, the financial difficulties facing households mean that high-interest rates are lowering economic growth.
“Consequently, an interest rate lift this week could cause little to no lasting appreciation in the rand, and instead, could well cause rand weakness,” Bishop said.
With the MPC unlikely to hike interest rates, markets will look at what the Fed decides tonight, with it also looking unlikely that the Fed will increase rates.
“Both Central Banks are, however, expected to evince hawkish tones as they seek to influence inflation expectations, and so consumer actions, by implying more interest rate hikes could be likely,” the economist added.
Investec has also continued to state that South Africa’s interest rate hike cycle is over and that consumers should expect cuts from Q1 2024. Investec’s expectations for interest rates can be found below:
|Period end rate %||Q1.23||Q2.23||Q3.23||Q4.23||Q1.24||Q2.24||Q3.24||Q4.24|
|Prime Overdraft Rate||11.25||11.75||11.75||11.75||11.50||11.00||11.00||10.50|