Economists and financial analysts are divided on whether the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) will raise the repo rate at their meeting tomorrow, although there is broad agreement that the interest-lowering part of the cycle has ended – a cycle which has brought South Africa the lowest interest rates in decades.
Two financial experts who believe we will face a rise in rates this week are Jeff Schultz, senior economist at BNP Paribas South Africa, and Reezwana Sumad, research analyst at Nedbank Corporate and Investment Banking.
Schultz says: “We expect the SARB to raise rates by 25 basis points (0.25 percentage points) to 3.75% at its final MPC meeting of the year on Thursday, representing a rise for the first time in three years. The decision will be closely contested though, given the lack of meaningful core inflation pressure and an uneven growth outlook. We expect a 3:2 split (of MPC votes) in favour of a hike.” Although expecting a rates hike tomorrow, Schultz believes the SARB “will continue to advocate a “gradual” normalisation cycle, with inflation largely under control”.
He says careful prudence and some materialising upside risks to inflation mean “we stick to our call that policy rates will end 2022 at 4.75% (which is 1.25 percentage points higher than the current level”.
Sumad points out that the SARB presented a “hawkish statement” in September, highlighting long-term inflation risks. “This was followed by an equally hawkish monetary policy review in October, in which it said real rates have turned more negative because expected inflation has risen. It stated that, ‘these developments imply a need for interest rates to begin normalising. The nominal repo rate is expected to gradually rise towards its neutral level over the medium term.’”
Sumad says that inflation risks have materialised, which “will likely prompt the SARB to raise the repo rate by 25 basis points this week”.
She says Nedbank CIB expects a 100 basis point rise in the repo rate by the end of next year, with the first hike materialising this week and a further hike in January.
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