South African Reserve Bank governor Lesetja Kganyago. Photo: Getty Images
An 11th consecutive interest rate hike might be on the cards on Thursday when the South African Reserve Bank’s monetary policy committee (MPC) concludes its meeting set to begin on Tuesday.
The MPC has raised its repo rate, at which it lends to commercial banks, by a cumulative 4.75 percentage points in its current hiking cycle which began in November 2021. The banks have passed on the cost of borrowing to consumers by a similar margin via the prime rate.
Consumers are unlikely to get much good news this week as economists expect another 25 basis points increase after the fourth policy meeting of the year. The MPC meets once every two months to decide on interest rates.
The anticipated July hike in the repo rate is likely to be the last one for a while, amid signs that inflation might be moderating.
Most of the upside risks to the inflation outlook flagged by the MPC at the May policy meeting have eased, Nedbank chief economist Nicky Weimar said.
“Global inflation is receding more convincingly. Global oil prices remain subdued and world food prices are still sliding off a high base. On the domestic front, electricity supply proved fractionally more reliable than most expected this winter and the rand pulled back from record lows against a weaker US dollar,” she said.
Domestic inflation trended downwards during the second quarter, with headline CPI dipping more than market expectations to a one-year low of 6.3% in May from 6.8% and 7.1% in April and March, respectively.
The annual rate of increase in the price of food and non-alcoholic beverages was 11.8% in May, lower than April’s 13.9% print, according to Statistics South Africa.
Agricultural economist Wandile Sihlobo said slowing food inflation could be a central theme for the second half of the year.
Nedbank’s Weimar said she believes that the Reserve Bank has done enough to tame inflation and facilitate a sustainable decline towards its 3% to 6% target range, although she warned that “the MPC will err on the side of caution”.
Inflation expectations, the threat of renewed severe load-shedding and the rand’s extreme vulnerability against the backdrop of the US Federal Reserve’s (Fed) hawkish rhetoric will set the tone for Thursday’s decision.
Last week, power utility Eskom announced a return to more intense stage six load-shedding, saying it needed to replenish emergency reserves.
For these reasons, Weimar argued that there would be greater damage from pausing rate hikes too soon than from over-tightening.
“Too restrictive policy can easily be reversed, while structurally higher inflation and persistently rising inflation expectations will require even greater economic sacrifices to rectify,” she said.
On Monday, the Bureau for Economic Research (BER) predicted a final repo rate hike of 25 basis points, saying this was informed by the expected decision by the Fed to hike its policy interest rate by 25 basis points next week after taking a breather in June.
The MPC will also be concerned about a further rise in inflation expectations during the second quarter of 2023, as well as the volatile rand, according to BER.
Stats SA is due to announce the June consumer inflation numbers on Wednesday, the day before the central bank makes its repo rate call. The BER believes that there will be a slowdown due to the petrol component falling into annual deflation and a projected further easing in the annual rate of increase for the food category.
Headline CPI will probably ease to 5.4% year-on-year in June from 6.3% in May, the bureau said.
Annabel Bishop, chief economist at Investec, also expects inflation to fall back within the Reserve Bank’s 3% to 6% target range, at 5.5% year-on-year.
Inflation will most likely continue its downward trajectory making further interest rate hikes unnecessary, Bishop said, predicting that the central bank would keep interest rates on hold on Thursday.
“The [bank] also needs at least a pause in its interest rate hike cycle to assess the impact on both inflation and the economy. Already, there is evidence of distress borrowing amongst households, the financial vulnerability of consumers has increased, while salary and wage increases are well below inflation,” Bishop said.
Last month two of the country’s biggest banks reported strain on their credit portfolios. In an investor update, FNB’s parent company FirstRand said it had seen marked growth in its unsecured lending, signalling that its customers have to make use of more expensive credit.
The group said customers are also having to extend their repayment plans to make them more affordable. The burden of higher borrowing costs on consumers has been coupled with handsome earnings for banks, the Mail & Guardian previously reported.
Standard Bank flagged impressive earnings growth because credit impairment charges were almost 50% higher for the first five months of this year compared with the same period last year. This was a result of larger lending books and consumer strain in South Africa.