South Africa Faces Additional Rate Hikes

The South African Reserve Bank (SARB) may have paused its interest rate hike cycle last week, but another boost is possible. Following eleven consecutive rate hikes, the SARB’s Monetary Policy Committee (MPC) barely decided three to two last week to maintain interest rates constant, with the repo and prime rates at 8.25% and 11.75%, respectively.

However, SARB governor Lesetja Kganyago stated that additional interest rate hikes are possible, depending on inflation. Although consumer price inflation (CPI) fell from 6.3% in May to 5.4% in June, remaining within the SARB’s goal range, the SARB remains concerned about inflation. The MPC’s future choices may be influenced by what occurs with interest rates in the United States.

According to Dr. Francois Stofberg of Efficient Wealth, the US Federal Reserve will most likely raise interest rates by 25 basis points when it meets later today, and it may raise them again before the end of the year. Although the US CPI fell to its lowest level in two years, the core CPI rate, which excludes energy and gasoline, increased by 4.8%. Policymakers in the United States are trying to reduce inflation down to the Fed’s 2% target.

According to the CME Group Fedwatch tool, there is a 98.9% possibility that the Fed will raise interest rates by 25 basis points. Stofberg predicted that the SARB, which often replicates what happens in the US, would raise interest rates as a result.

“In light of this, the SARB will almost certainly feel obligated to raise rates as well, despite the fact that there is little evidence to support their conviction that higher interest rates in South Africa can attract short-term capital to the country in this environment,” he added. “If the conditions were different, their plan might have worked, but not in the current uncertain global environment.”

It might not.

According to Investec Chief Economist Annabel Bishop, the US will continue to tighten policy as it confronts inflation. “Lower US inflation figures, particularly core inflation measures in the US, will reduce upward pressure on the US interest rate hike cycle,” Bishop said. “However, the Fed is likely to maintain hawkish communications to contain inflation expectations.”

However, Bishop stated that the SARB will most likely leave interest rates unchanged for the rest of the year, effectively ending the current rate hike cycle. “Looking ahead, South Africa’s forward rate agreement (FRA) curve does not anticipate an interest rate hike in July, not even a 25bp increase.” No further hikes are projected for the rest of the year, which corresponds to our expectation of no further hikes in the South African interest rate cycle,” she said.

Kind Regards

CPI Payroll Support Team

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