On a knife-edge: Higher inflation could push Reserve Bank to hike repo rate today

Tension mounts as South Africa awaits today’s repo rate decision. Picture: Arina Krasnikova/Pexels

Tension mounts as South Africa awaits today’s repo rate decision. Picture: Arina Krasnikova/Pexels

Published Nov 23, 2023


Hopes that the repo rate may hold steady following Thursday’s Monetary Policy Committee (MPC) meeting have been dealt a blow after the latest Consumer Price Index (CPI) revealed annual inflation to have risen for the third month in a row.

Not only that, but monthly price inflation went up by almost one percent, the highest jump since January.

The CPI figure for October came in at 5.9 percent, which is a touch under the South African Reserve Bank’s (SARB) upper inflation limit of six percent – and an increase that not many people expected.

“I would have hoped that CPI wouldn’t have ramped up as much,” says Angelika Goliger, chief economist at EY Africa.

“The food and beverage category saw the sharpest jump in prices, growing by 8.7 percent, which was to be expected given the egg shortage in the month. Transport prices also rose by 7.4 percent, due to the rise in the fuel price.”

While consumers can expect some relief at the pumps in December, thanks to the oil price coming down and the rand stabilising somewhat, she believes that the likelihood of a 0.25 percent repo rate hike is now stronger.

“Inflation has been accelerating over the past three months – the opposite of what the MPC would like to see, and there is also the added risk of what South Africa’s latest round of port challenges could do to prices in the coming weeks.”

BetterBond’s head of sales Bradd Bendall is still holding on to the belief that the repo rate will stay at 8.25 percent, keeping the prime lending rate (interest rate) at 11.75 percent.

“While a drop would be welcomed, we understand that there are still inflationary pressures and a more cautious approach to interest rates at this time is still prudent. However, there are signs that the upward rate cycle is at its peak, with the strengthening rand exchange rate and global drop in oil prices meaning that these risks have reduced.

“This should usher in a more accommodative rates environment in 2024, which will bring much-needed financial relief to consumers and reinvigorate buying activity in the residential property market.”

PwC also expects the repo rate to remain unchanged following the MPC meeting – the final one for 2023. The exchange rate, industrial production, and international monetary policy factors all point to local policymakers not needing to increase the repo rate further at this time, the accounting firm states.

“At their last meeting in September, three MPC members voted to keep the repo rate at 8.25 percent while the other two policymakers favoured an increase to 8.5 percent. The repo rate was eventually left unchanged based on the macroeconomic circumstances at the time and the medium-term economic forecasts generated by the SARB.”

Following the September MPC meeting, PwC says many economists were, by October, thinking that policymakers would lift the repo rate by around 0.25 percent in November. The SARB noted in September that risks to the inflation outlook were to the upside, and many signs pointed to more upward pressure on consumer price inflation. Over the past several weeks, though, a collection of developments and data releases have “eased concern about inflation in the short-term, while the outlook for economic growth has also deteriorated”.

The firm bases its repo rate expectation on these four factors, and explains how they are likely to affect the MPC’s decision:

1. From a financial markets perspective, the rand has strengthened against major currencies since the last MPC meeting. This is positive news when thinking about the cost of imported goods like fuel and food products. In addition, the oil price has softened and local fuel prices are thus expected to decline again in December.

2. From a macroeconomic perspective, the most recent manufacturing and mining production data from Stats SA sent disappointing signals about the outlook for economic growth in the third quarter. While South Africa has received some positive employment data and better-than-expected retail sales numbers over the past week, the overall outlook for the economy remains downbeat. This could result in the SARB lowering its economic growth expectations for 2023 and 2024.

3. Cooling inflation in the world’s largest economy will likely result in the US Federal Reserve holding off on further interest rate hikes in the near-term, before easing monetary policy in 2024. While the SARB does not directly track international lending rates in its policy decisions, the South African interest rate premium over advanced economies is an important aspect in the valuation of the rand which, in turn, impacts the nature of imported inflation.

4. Core inflation has shown favourable trends of late. In September, core inflation – a less erratic measure of inflation as it excludes the volatile food and fuel prices – declined to 4.5 percent This decline to the midpoint of the inflation target range would have eased concerns in the minds of MPC members about underlying inflation. (Note: PwC’s commentary was released before the October inflation rates were published)

Combined, PwC says these factors point to easing pressure on the local inflation and global interest rate forecast, but further pressure on the domestic economic growth outlook. Its economists therefore believe that following no change to interest rates in July and September, the SARB MPC will again hold steady in November, with the repo rate peak firmly in place.

It adds: “The next move in interest rates will be down: we expect this to happen around the middle of 2024. The next round of SARB forecasts will help economists to refine their predictions of when interest rates will start coming down and by how much.”

That said, PwC is firmly of the belief that the repo rate will not be cut as deeply as it was during the Covid-19 crisis.

“At present, we believe the repo rate could ease by a cumulative 150 basis points between mid-2024 and end-2025.”

Meanwhile, there is mounting pressure on the SARB to address the Competition Commission’s findings of currency manipulation, with some people wondering whether Reserve Bank Governor Lesetja Kganyago will speak on it at today’s repo rate decision announcement.

However, Harry Scherzer, chief executive of financial services provider Future Forex, which specialises in foreign exchange investments, believes it is “unlikely” he will do so today as his speech focuses on the country’s economic outlook and interest rates.

Nonetheless, Scherzer hopes that the SARB will give its comments on the Commission’s findings “at some point”.

“South Africans can no longer afford to be in the dark about the true costs of forex transactions, whether sending or receiving funds from abroad. Pure transparency and fair charges should be the new status quo.”

In fact, results of a recent survey conducted by Future Forex reveal that less than 10 percent of South African businesses receive fair and transparent forex charges.

“This is in line with the Competition Commission's findings that there is insufficient transparency in this sector,” he says.

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