● Bank on higher interest rates for longer

Analysts expect an up to 50 basis points hike this week, with the market pricing in more increases

● With rising inflation and the recent weakening of the rand against the dollar, experts forecast further rates hikes.

Analysts said this week they expected the Reserve Bank’s monetary policy committee (MPC) will hike the repo rate by up to 50 basis points when it meets on Thursday. This will take it to 8.25% from 7.75% and the prime lending rate to 11.75% from 11.25%.

Izak Odendaal, an investment strategist at Old Mutual Multi-Managers, said a hike is highly likely.

“The bigger question is whether it is a small or a big hike. My guess is they will hike by 50 basis points in an attempt to stabilise the rand. Then we’ll have to wait and see how the outlook evolves ahead of the next meeting. The market is pricing in a further 100 basis points in increases, though that seems extreme given the weak economy.”

The deteriorating economy is reflected in employment data released this week by Stats SA. They show the joblessness rate for the first quarter of 2023 rose to 32.9% from 32.7% in the previous quarter, with the number of unemployed people increasing by 179,000 to 7.9million.

Casey Delport, an investment analyst for fixed income at Anchor Capital, said the expanded definition, which includes those discouraged from seeking work, is concerningly high at 42.4%.

“This points to longer-term structural issues within the local economy as it is difficult to reincorporate and entice discouraged work seekers back into the labour force.”

Delport added that South Africa’s unemployment problem remains particularly acute among the youth (62.1%), where high levels of unemployment hinder young people’s prospects and worsen social inequalities.

Odendaal said: “This might be the final hike, but it will depend on how the local and global situation evolves. The big problem is that inflation has been printing higher than expected, largely because of food prices, but core inflation has also been elevated. Coupled with that, the rand has been much weaker than its peer currencies since the start of the year and hit record lows against the dollar in recent days.”

Against the dollar, the rand has fallen 6.8% in the year to date and 17.6% over the past year. It tanked to its lowest level since April 2020 last week, rattled by US allegations that South Africa supplied arms to Russia.

Nedbank economist Isaac Matshego said the rand’s depreciation raises the probability of another 50 basis points hike as the Reserve Bank previously warned about the inflationary effect of further rand weakness.

“That scenario has played out, with intense load-shedding and political uncertainty hitting the local unit. Anecdotal evidence points to rising pressure on consumers and businesses from the high interest rates, with defaults on home loans in particular ticking higher. Demand pressure on inflation is virtually nonexistent, but the Reserve Bank will continue to fret about the risk of an inflation spiral due to the shocks on the economy,” Matshego said.

After cutting the repurchase rate during the Covid-19 pandemic to an all-time low of 3.5% in July 2020, the central bank has hiked it by 425 basis points since November 2021 to address rising inflation.

Higher global food and oil prices resulted in domestic headline inflation touching a 14-year high of 7.8% in July 2022. This eased to 7.1% in March.

Mamello Matikinca-Ngwenya, FNB chief economist, said there is a risk of a 25 basis points hike with the latest rand depreciation and the pressure it exerts on inflation.

“To rein in sticky inflation and inflation expectations that are higher than the Reserve Bank’s preferred anchor of 4.5%, there is a strong likelihood the MPC will keep rates higher for longer. In line with this, we see a shallow cutting cycle starting towards the end of 2024 and interest rates settling at around 7%.

Matikinca-Ngwenya said rising interest rates will have an impact on already stretched businesses and households.

“The initial consequence of the Reserve Bank’s hiking cycle is that domestic demand will decrease, economic growth will weaken and inflation will soften. This transmission process is estimated to take 12 months to 24 months.

“The challenge is not knowing how much tightening will be enough until the effects of policy decisions fully permeate the economy. The risk of over-tightening is a ‘hard landing’ for the economy, weak or contractionary economic outcomes and inflation undershooting target,” she said.

Dick Forslund, a senior economist at Alternative Information & Development Centre, said to curb inflation price controls on food and necessities are crucial.

“If you increase interest rates when the economy is stagnant, you provoke an actual drop in production and more unemployment,” he said.

The big problem is that inflation has been printing higher than expected, largely because of food prices Izak Odendaal

Investment strategist, Old Mutual Multi-Managers