South Africans may have experienced the last interest rate hike in the current cycle, as economists predict that rates will remain at their current level for some time before a potential decrease.
The Monetary Policy Committee of the South African Reserve Bank (SARB) unanimously raised the repo rate by 25 basis points to 7.25% on Wednesday, which led to an increase in the base lending rate to 10.75%.
Although the hike was widely expected, PSG senior economist Johann Els noted that the unanimous decision was tougher than he anticipated. He stated: 'I expected the decision to be close, with a strong argument for a rate hike. However, the fact that it was unanimous turned out to be tougher than I expected.'
Likely Pause
Els believes that the monetary policy committee had enough arguments to keep rates unchanged, but the Bank's concerns about the global supply shock persisting long enough to raise inflation expectations ultimately outweighed other arguments.
Despite the unanimous vote, Els does not expect further hikes under current conditions. Furthermore, the SARB's Quarterly Projections Model (QPM) basic scenario also does not foresee further increases, although Els warns that the model should not be taken too literally, as circumstances can change.
He concludes: 'In my own forecast, the fact that they hiked the rate in May and now hiked it again in September, acknowledging that monetary policy is already restrictive, means there should be no further rate hikes under current circumstances.'
Has the Peak Been Reached?
Dr. Elna Moolman, Head of Macroeconomic Research at Standard Bank Group, agrees that rates may have reached their peak. She notes: 'It is very likely that this could be the peak in the interest rate hiking cycle, and it is possible that the Reserve Bank will have the opportunity to start providing some interest rate relief by the end of next year.'
However, Moolman emphasizes that this will depend on oil price dynamics and whether higher transport costs will affect other prices. Harry Scherzer, CEO of Future Forex, shares a similar view, suggesting the question is whether Wednesday's hike marks the peak of the tightening cycle. He adds: 'A lot will depend on the trajectory of inflation, oil prices, the rand, and global interest rates in the coming months.'
Further hikes are not ruled out. Els points out that SARB considered an alternative scenario where global interest rates rise more than assumed in the baseline scenario, leading to another local rate hike and a longer period of high rates. A second scenario related to rising inflation expectations and wages also leads to a rate hike.
SARB is forced to balance weak domestic growth against renewed external inflationary risks.
Weak Economy
The possibility of further tightening comes amid pressure on the domestic economy. Economist Lara Hodes from Investec reports that consumer and business confidence remains low, while GDP contracted in the second quarter. SARB forecasts economic growth of 1.2% this year.
Els argues that the Bank sees downside risks to economic growth, with the global environment having a greater impact on South Africa than previously expected. Rhys Dyer, CEO of ooba Group, says SARB is forced to balance weak domestic growth against increased external inflationary risks. Dyer states: 'SARB is navigating an increasingly complex balance between slowing domestic growth and renewed external inflationary pressure.'
Risk Containment
Els believes that the weakness of the economy itself reduces the risk of entrenched inflation. He notes that the economy is not strong enough to generate demand-driven inflation or significant secondary price impacts, while supply shocks ultimately negatively affect demand and growth.
If conditions in the Middle East improve and oil prices drop sharply, the inflation forecast may improve faster than SARB expects, paving the way for an earlier rate cut. Els concludes: 'In such a scenario, I think the rate cut could also happen earlier than currently expected. Therefore, my expectation is no further rate hikes after this, under current circumstances.'