Consumers must brace for more repo rate hikes until there is a meaningful decline in the inflation rat.
However, comments from key Reserve Bank policymakers on the requirements for an end to the domestic policy interest rate hiking cycle indicates the string of interest rate increases is coming to an end.
Though we are not there yet, says the Bureau for Economic Research (BER) at Stellenbosch University, adding that at the same time, if sustained, the latest movements of the rand exchange rate and international oil prices are support the outlook for consumer inflation and borrowing costs.
Governor of the South African Reserve Bank (Sarb), Lesetja Kganyago, said in an investor feedback session on Friday, that the monetary policy committee (MPC) would need to see consumer inflation move down sustainably to the 4.5% inflation target midpoint before it will feel comfortable to stop or pause the rate hiking cycle.
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Inflation expected to remain between 7 to 7.5%
The BER says Friday’s feedback session reiterated that a meaningful decline in the inflation rate is necessary before the MPC would cease hiking.
“Importantly our current headline inflation forecast is for near-term CPI to remain sticky between 7 to 7.5% and therefore, all else being equal, the MPC is most likely to increase the repo rate again during its next meeting in January.”
The bureau says, based on the MPC’s commentary on Thursday and Friday, that it seems there is a risk that the repo rate will be increased with more than the 25 basis points the BER expects in January to a terminal (peak) rate of 7.25%.
“In contrast to the comments from MPC members and the near-term sticky inflation outlook, which highlights the possibility of a 50-basis points repo rate hike in January, financial market developments over the past week were more constructive, with the rand exchange rate gaining further ground, moving to stronger than R17/$ at one point.”
The rand gained ground after the US dollar came under some pressure as the latest Fed minutes supported expectations that the US central bank could slow down the pace of policy rate hikes at its next meeting in mid-December.
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The oil price and credit ratings are looking up
BER says another domestic factor that could contribute to lower inflation is the oil price, with the 1-month Brent crude future falling below $84/bbl.
“So far in November, Brent crude declined by about $10/bbl, or almost 12%. Although the economic data releases from major economies were in some cases not as bad as expected over the past week, the oil price continues to be pressured by rising concern about global growth prospects in 2023.”
Renewed Covid lockdowns in China was the most likely important catalyst for the lower oil price and if sustained, less expensive oil and a stronger rand will bring down the rate of local inflation at a faster pace than currently expected.
Other good developments in the local economy last week were PetroSA providing a temporary diesel lifeline to Eskom, returning its open cycle gas turbines to service and ratings agency Fitch keeping its credit rating (BB-) for the country unchanged.
BER says it is important to note that Fitch also stuck by the stable ratings outlook, suggesting that, despite South Africa’s much improved public finances relative to what was expected 12 months ago, an outright credit rating upgrade from Fitch is unlikely in the foreseeable future.
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But load shedding…
However, load shedding remains a major economic problem. Sarb’s forecast for real gross domestic product (GDP) growth in 2022 was roughly unchanged at 1.8%, with moderate quarterly expansions expected in the second half of the year, as intense load shedding takes a heavy toll on economic activity.
“The growth forecasts for 2023 and 2024 were revised down more significantly, while CPI inflation forecasts for 2022 and 2023 were revised marginally higher on the back of a weaker outlook for the rand exchange rate.
“Still, inflation risks continue to be judged on the upside because of higher than expected administered prices and salary increases that could exceed the Sarb’s baseline view,” BER says.
