The South African Reserve Bank will keep its foot firmly on the pedal, with broad price pressures prompting a 75 basis-point interest rate hike and a hawkish statement next week, 22 September, according to Jeff Schultz, senior economist at BNP Paribas South Africa.
“We expect further hikes to follow, with a 7.00% terminal rate to be reached in January 2023,” he said in a note on Wednesday (14 September).
This will deal yet another hammer blow to consumers already buckling under the strain of rising living costs.
Adrian Goslett, regional chief executive of RE/MAX said that interest rates are beginning to resemble pre-pandemic levels of around 10% (prime), meaning that long-term homeowners will be accustomed to rates at these highs.
“My concern is around the many first-time home buyers who entered the market when interest rates were at an all-time low and who might be unfamiliar with the fact that interest rates change often over the span of a twenty-year loan term. For these kinds of homeowners, I would encourage them to do the necessary repayment calculations ahead of the next MPC (Monetary Policy Committee) meeting to make sure they can afford the higher repayments.”
Schultz said that the bank’s above-consensus view reflects rising unit labour costs, sticky two-year inflation expectations and the prospect of rand weakness on a return to twin deficits. “The risks to our view are tilted to the upside, with the possibility of higher rates into next year if core pressures prove more problematic than we already expect.”
Too early for ‘peak hawkishness’
BNP Paribas said it does not think the SARB yet fits the mould of those EM central banks that have signalled a slowdown in the pace of tightening. “For starters, the SARB has thus far unwound only 200bp of its 275bp policy support in response to the pandemic,” said Schultz.
“Next Thursday’s 75bp would bring the repo rate back to pre-Covid levels, but we think that would be insufficient in light of South Africa’s sticky inflation outlook.” The main reason for this outlook, said the economist, is that he anticipates a slow return to the inflation target in H2 2024.
“Judging by SARB governor Lesetja Kganyago’s recent comments that it is “too early to call the inflation peak”, the bank is uneasy – and rightly so, in our view – with materialising upside risks to the inflation outlook, despite slowing global oil and food prices,” he said.
The European Central Bank meanwhile announced a 75 basis point interest rate rise last week, and the US and UK are expected to follow suit.
The Federal Reserve is anticipated to deliver another 75-basis-point interest rate hike next week and likely hold its policy rate steady for an extended period once it eventually peaks, according to a Reuters poll of economists released on Tuesday.
The Bank of England (BOE) also holds its own meeting on 22 September, where experts are currently torn between a 50 or 75 basis-point increase. Bloomberg Economics expects inflation to peak at 10.5% in October, well below the more than 13% forecast by the BOE in August.
For South Africa, BNP Paribas said it thinks risks to its 75 basis-point call for September’s meeting are skewed towards a more hawkish statement and 100 basis-point hike; a 50 basis-point move right now is much less likely.
“Our base case is for September’s 75bp to be followed by another 50bp in November and a final 25bp in January 2023 for a terminal rate of 7.00%, with the risk of up to 7.50%, depending on how risks materialise. Markets are pricing in more than 150bp of hikes before year-end, compared with the current Reuters sell-side consensus of 100bp, said Schultz.
BNP Paribas said it warned early this year that unit labour costs, an important anchor of low-for-longer core inflation, were starting to rise. “We maintain this concern, as economic momentum is already slowing down while the average level of wage settlement looks to be above a 6.0% increase.
“We think headline inflation peaked in July, as we expect next week’s August data to show the CPI rate slowing to 7.4% from 7.8% in July; however, we think core CPI will continue to climb, hitting 4.7% in August and peaking at 5.7% only in May 2023,” said Schultz.
Read: South Africa has returned to 1950s living