According to Jeff Schultz, senior economist at BNP Paribas South Africa, the Reserve Bank of South Africa will keep its foot firmly on the pedal as broad-based price pressures lead to a 75 basis point interest rate hike and a stunning announcement next week on September 22.
“We expect a further rate hike of 7.00% in January 2023,” he said in a note on Wednesday (14 September).
This will deal another hammer blow to consumers who are already suffering from the rising cost of living.
Adrian Goslett, RE/MAX regional executive, said interest rates are beginning to resemble pre-pandemic levels of around 10% (prime), meaning long-term homeowners are getting used to such high rates.
“My concern is for many first-time homebuyers who entered the market when interest rates were at their lowest, and who may be unfamiliar with the fact that interest rates change frequently over the course of a twenty-year loan term. For such homeowners, I would encourage them to do the necessary repayment calculations ahead of the next MPC (Monetary Policy Committee) meeting to ensure they can afford higher repayments.”
Schultz said the bank’s higher consensus view reflected rising unit labor costs, volatile two-year inflation expectations and the prospect of a weaker rand on a return to twin deficits. “Risks are tilted to the upside in our view, with the possibility of rate hikes next year if underlying pressures prove more problematic than we expect.”
Too early for peak hawkishness
BNP Paribas said it did not believe the SARB was yet to fit the pattern of those EM central banks that have signaled a slowdown in the pace of tightening. “For starters, the SARB has only given up 200 bp so far. from its political support in 275 bp. in response to the pandemic,” Schultz said.
“75 b.p. will return the repo rate to pre-Covid levels next Thursday, but we believe this will not be enough in light of the sharp inflation forecast in South Africa.” The main reason for this forecast, the economist said, is that it foresees a slow return to the inflation target in the second half of 2024.
“Judging by SARB Governor Lesethji Kganyaga’s recent comment that it is ‘too early to call inflation peaking’, the bank is concerned – and rightly so, in our view – with upside risks materializing to the inflation outlook despite a slowdown in global oil and food growth . prices,” he said.
Meanwhile, the European Central Bank announced a 75 basis point interest rate hike last week, and the US and UK are expected to follow suit.
The Federal Reserve is expected to raise interest rates by another 75 basis points next week and is likely to keep the rate steady for an extended period when it eventually peaks, according to a Reuters poll of economists released on Tuesday.
The Bank of England (BOE) is also holding its own meeting on September 22, where experts are currently torn between an increase of 50 or 75 basis points. Bloomberg Economics expects inflation to peak at 10.5% in October, well below the Bank of England’s forecast of more than 13% in August.
On South Africa, BNP Paribas said it sees risks to its September meeting bid of 75 basis points leaning towards a tougher statement and a 100 basis point hike; a move of 50 basis points is much less likely now.
“Our basic option is that behind September’s 75 bp. will follow another 50 bp. in November and the last 25 bp. in January 2023 at a final rate of 7.00%, with a risk of up to 7.50%, depending on how the risks materialize. Markets predict a price increase of more than 150 bp. by the end of the year, compared with the current Reuters sales consensus of 100 bps, Schultz said.
BNP Paribas said it warned earlier this year that output spending, an important anchor of low and sustained core inflation, was beginning to rise. “We support this concern as economic momentum is already slowing and average wages appear to be outpacing 6.0% growth.
“We believe that headline inflation peaked in July as we expect August data next week to show that the CPI level has slowed to 7.4% from 7.8% in July; however, we believe the core CPI will continue to rise, reaching 4.7% in August and peaking at 5.7% only in May 2023,” Schultz said.
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