Will the Sarb’s tightening cycle end at 500bps?

The South African Reserve Bank (Sarb) is likely to increase its repo rate one more time – by 25 basis points (bps) on Thursday – ending its tightening cycle with 500bps in cumulative increases since the hikes began back in 2021.

That’s the consensus view of most economists commenting this week, ahead of the repo rate announcement.

The Sarb’s hiking cycle has resulted in a combined 475bps increase in the repo rate since November 2021 when the central bank adopted a combative stance against sticky inflation. This rapid rise in the repo rate was a dramatic turnaround from the ultra-low pandemic levels of 2021, when the benchmark rate bottomed at 3.5%, and was the most aggressive policy tightening action by the Sarb since the 2006 to 2008 period.

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The Reserve Bank’s hawkish stance mimicked those of central banks across major economies, faced with the highest inflation levels in decades in some markets.

While the US Federal Reserve moved to keep its benchmark rate unchanged at its June policy meeting, market commentators have cautioned that more increases could still be on the cards.

In the South African market, a majority of market watchers and economists anticipate that the Sarb’s Monetary Policy Committee (MPC) will hike the repo rate by 25bps once more at its fourth rate-setting meeting this year.

Rand sensitivity

Rand sensitivity and risks brought on by the impacts of load shedding among other factors leave room for the Sarb to announce a 25bp increase, Kim Silberman, an economist at Matrix Fund Managers tells Moneyweb.

She says the rand, which has experienced increased volatility over the past couple of months, is vulnerable to a selloff.

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“In the background, you’ve got global investors that are requiring higher yields in order to invest in SA and what we’re also seeing seems like a more volatile investment into SA bonds.”

Silberman also cautions that the interest rate differential between South Africa and the US, the latter with a benchmark rate of 5%, is too low.

“The protection of the currency from the interest rate is lower than usual, plus you’ve got a higher sovereign risk premium because of load shedding and fiscal deterioration … All of these play into the need for the Reserve Bank to protect the value of the currency.”

However, she believes that with inflation expectations anchored to the downside, a pause at 8.5% is likely to ensue at September’s meeting.

Final hike … or not even?

This final hike would mark a slowdown in the pace of the Sarb’s raising cycle after two sizeable hikes of 50bps each at the past two MPC meetings, according to HSBC economist David Faulkner in a global research note published this week.

Faulkner says the decision is likely to be split between the MPC members, with some likely to vote to keep rates unchanged.

He expects a combination of factors to dominate at the meeting, including the ongoing rise in inflation expectations in certain areas, higher interest rates in major economies, as well as tighter global financial conditions amid South Africa’s sizeable domestic and external financing needs.

But a hold may not be completely off the cards, say some analysts, who think the Sarb’s May hike could have been the last in the current hiking cycle.

Miyelani Maluleke, an economist at Absa Corporate and Investment Banking, says rand strength against the US dollar, despite recent volatility and cooling inflation, gives the Sarb scope to hold rates on Thursday, even though risks of a 25bps hike remain.

Against the dollar, the rand has strengthened over 8% since the May MPC meeting and inflation cooled for a second consecutive month in May to reach 6.3%.

Stats SA is expected to release the latest inflation reading for June on Wednesday, a day before the Sarb announces its July repo rate decision.

“While the easing in headline CPI inflation has mostly come from base effects on fuel and food prices, core CPI data do not point to any significant deterioration in underlying price pressures recently,” says Absa’s economic unit in a note.

“In fact, it appears that the last couple of core CPI prints may have surprised the Sarb to the downside based on its May forecasts.”

The bank also cites improved electricity supply, saying this may help abate inflationary pressures in the form of increased costs of running businesses.

It adds that although it believes the MPC has scope to pause at this meeting there is still “risk of a 25bp hike”.

Frank Blackmore, lead economist at KPMG, expects Stats SA to announce that inflation  slowed to below 6% in June, but says this would still leave CPI above the midpoint  of the Reserve Bank’s 3% to 6% inflation target band – necessitating a 25bps hike.

He sees a rate cut coming as early as November, saying that inflation may tread closer to the 4.5% midpoint.

“And I think the Reserve Bank will see a chance [to] give us perhaps a cut at that point, about 50bps and that will be well received going into the year-end period.”

Read: SA crisis is eroding a basic rule of monetary policy

EY Africa chief economist Angelika Goliger is also pricing in a 25bps increase this week – saying that although there is a chance the MPC “may keep the repo rate at the current rate of 8.25% as inflation has come down significantly”, she believes it “will likely remain cautious”.

Listen to Jimmy Moyaha’s interview with RMB chief economist Isaah Mhlanga (or read the transcript here):

You can also listen to this podcast on iono.fm here.