Interest rate hike warning for South Africa

South Africa is likely to see at least three interest rate hikes in 2022 as the South African Reserve Bank (SARB) has indicated that it will begin unwinding its accommodative monetary policy stance, say economists at Momentum Investments.

In a research note on Tuesday (4 January), the group said that the SARB’s quarterly projection model calculates a steep interest rate hiking cycle – resulting in interest rates of 5.75% by the end of 2023 and 6.75% by the end of 2024.

However, Reserve Bank governor Lesetja Kganyago has long maintained that the model is a broad policy guide and that future interest-rate decisions will be data-dependent.

The South African Reserve Bank’s Monetary Policy Committee (MPC) decided in November to raise the repurchase rate by 25 basis points to 3.75% per annum.

Kganyago said that the implied policy rate path of the Quarterly Projection Model (QPM) indicated an increase of 25 basis points in the fourth quarter of 2021 and further increases in each quarter of 2022, 2023 and 2024.

“As usual, the repo rate projection from the QPM remains a broad policy guide, changing from meeting to meeting in response to new data and risks.”

He said that given the expected trajectory for headline inflation and upside risks, the committee believed a gradual rise in the repo rate would be sufficient to keep inflation expectations
well anchored and moderate the future path of interest rates.

The governor said that in the next two years, economic growth is expected to align with a low rate of potential growth. GDP is expected to grow by 1.7% in 2022 and by 1.8% in 2023. GDP growth in 2024 is forecast to be 2.0%.

The bank’s forecast reflects higher headline inflation for the fourth quarter, at 5.3% (from 5.0%). For this year and the next two years, headline consumer price inflation is revised slightly higher, to 4.5% for 2021 (from 4.4%), to 4.3% next year (from 4.2%), and to 4.6% in 2023 (from 4.5%). Headline CPI for 2024 is expected to be 4.5%.

The forecast for core inflation remains at 3.0% in 2021 and is slightly lower at 3.7% in 2022 (from 3.8%), Kganyago said. Core inflation is expected to be slightly higher at 4.4% in 2023 (from 4.3%), and reaches 4.5% in 2024.

“In our view, well-behaved inflation, anchored inflation expectations, and a pedestrian growth outlook advocate a more moderate interest rate hiking cycle,” Momentum said.

“We expect the SARB to hike interest rates thrice by a cumulative 75 basis points in 2022 and a further three times by another 75 basis points in 2023.”

Momentum said that regulated administered prices such as electricity and water tariffs, as well as further government wage settlements, all pose a risk to the country’s inflation trajectory in the coming year.

“A tempered rise in rental inflation and reduced increases in medical aid tariffs are likely to drive an atypical response in local inflation. We expect headline inflation to average 4.5% in 2021, 4.6% in 2022, and 4.3% in 2023,” it said.

While international food prices have continued to increase, Momentum said that it does not expect these to reflect in local prices, bringing some relief to low-income consumers. Petrol prices are also expected to moderate on the back of warmer Nothern Hemisphere weather and steadying oil prices.

Economists predict South Africa will miss the central bank’s economic growth forecast of 5.2% for 2021 after output fell more than expected in the third quarter and more than 90 nations introduced travel restrictions on South Africa before its summer holiday season over concerns about Omicron.

The Monetary Policy Committee is expected to meet again towards the end of January.

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