With South Africa’s headline consumer inflation coming in at 7.4% for June – 1.4 percentage points above the top end of the SA Reserve Bank (Sarb) target and hitting a 13-year high – the central bank may have no option but to hike the repo rate by 75 basis points (bps) on Thursday.
This would be the sharpest hike in almost two decades. The last time the Sarb hiked by 75bps was in September 2002.
Whether it is a 75bps or 50bps hike that Sarb Governor Lesetja Kganyago announces just after 2pm, it is likely to be a split vote by the bank’s five-member Monetary Policy Committee (MPC).
Several economists have been predicting a 50bps hike for the July MPC meeting, but that was before the higher-than-expected June inflation figure was published by Stats SA on Wednesday.
The latest Consumer Price Index (CPI) number of 7.4% comes off the back of spiralling fuel and food prices globally since the start of the year, which have been exacerbated by Russia-Ukraine war.
South African consumer #inflation reached a 13-year high in June, registering at 7,4%. This was up from 6,5% in May.
— Stats SA (@StatsSA) July 20, 2022
Consensus among economists and analysts was that the June CPI reading would come in at 7.2%, after breaching the Sarb’s 4-6% inflation target for May. CPI in May came in at 6.5%, well ahead of analysts’ forecasts of around 6.1%.
With inflation hitting multi-decade highs in key international markets, countries like the US have been forced to up rates by 75bps (at the Federal Reserve’s last meeting). While SA and several emerging markets started hiking repo rates earlier, the move by the US has rattled global markets and is fuelling forecasts of a US recession and possible global recession.
If the US Federal Reserve is forced to continue to take a hawkish stance on rates to bring inflation under control, the likes of the Sarb may follow suit, to keep the interest rate differential between SA and developed markets stable.
Commenting on Tuesday, ahead of the June CPI reading and the MPC meet, BNP Paribas South Africa senior economist Jeff Schultz reckons the Sarb will hike the repo rate by 75bps to 5.5%.
This would see SA’s prime lending rate of commercial banks increase to 9%.
“Don’t expect the [Sarb MPC’s] decision to be unanimous, we think a 3-2 split in favour of a faster frontloading is likely,” says Schultz.
“However, the changes to its quarterly projection model [QPM] are likely to be meaningful, changing some of the recent language by some members around little need for faster action [in reference to its outdated May projections],” he adds.
Schultz says the Sarb’s estimates for CPI in 2022 (5.9%) and 2023 (5%) will need to be revised higher.
“While arguably most of this is likely to be food and fuel driven, the persistence of non-core pressures alongside wage settlements creeping towards 6% year-to-date is likely to raise concerns,” he notes.
Exchange rate gap
According to Schultz, the rand has depreciated by around 4.5% in trade-weighted terms and 7.8% against the US dollar since the MPC’s last meeting in May.
“The bank’s implied starting point for US$/ZAR in its QPM was R15.88 and will likely be adjusted higher this week,” he says.
He also highlights the interest rate gap between SA and developed markets (like the US), noting the Sarb’s G3 interest rate assumptions will now need to be revised higher.
“The Sarb assumed steady 25bps incremental hikes from the US Fed… Clearly this will have to be adjusted based on the Fed’s 75bps June hike and strong likelihood of another 75bps this month,” says Schultz.
“In fitting with the Sarb’s consistent language that the QPM should be used as a ‘guide’ rather than a dogmatic policy tool, we believe that a majority on the MPC are likely to favour additional frontloading of 75bps as it looks to attempt to nip early signals of second-round inflation and expectations in the bud,” he adds.
Makwe Masilela, chief investment officer of Makwe Fund Managers, also believes the Sarb will take a more hawkish move.
Speaking on SAFM Moneyweb Market Update on Monday, Masilela said he would not rule out a 75bps hike at this week’s MPC meeting.
“[This is] especially when we expect the US to increase by 75bps for a second time [this month] and also given that our [SA] inflation is totally out of control,” he said.
“The point here is we know our Reserve Bank have a sole mandate, mainly price stability… To make sure that they tame inflation,” he added.
Masilela also emphasised that the interest rate differential between SA and the US would be a factor for the Sarb to consider.