Economists and financial experts believe the interest rate will hold steady at the next Monetary Policy Committee meeting this week, despite fuel prices predicted to go up again next month and the rand weakening against the US dollar.
The latest Consumer Price Inflation index will only be released on Wednesday, one day before the repo rate decision, but the recent declines in inflation are still considered to be strong enough to avoid a rate hike.
South African consumers will continue feeling financial pressure though as rates hold higher for longer than they did in previous hiking cycles.
Nolan Wapenaar, co-chief information officer at wealth and asset management business Anchor Capital, says the company is of the view that the MPC will keep interest rates stable.
“We think that the recent decline of inflation expectations reported by the Bureau of Economic Research will give the MPC confidence that inflation is sustainably moving in the correct direction. We think that the recent rand weakness and higher oil prices will see headline inflation push back towards six percent but remain of the view that inflation is towards the mid-point of the target band by the middle of next year.”
Anchor Capital is, however, watching for the MPC to highlight the risk from the fiscal standoff in the government and the possible impact of currency weakness on their forecast.
“Overall, a hawkish hold is most likely. We are watching for the SARB to indicate that rates will stay higher for longer than the markets are anticipating as premature cuts have in the past seen a resurgence of inflation.”
Wapenaar notes that consumers are already feeling the pressures of rate hikes and the rising cost of living and that, unfortunately, base rates in South Africa will probably be higher than they were for the previous cycle.
“The environment is financially difficult for most while we wait for rate cuts that will eventually arrive.”
Echoing this, Angelika Goliger, chief economist at EY Africa, says comments by Reserve Bank Governor Lesetja Kganyago over the weekend “poured cold water on any hope that there would be an interest rate cut any time soon”.
“Yes, on the positive side, we have seen inflation within the Reserve Bank’s target range of between three to six percent over the last two prints, and we will see this again when the August CPI report comes out on Wednesday.”
To add to the good news, she says inflation expectations have also moderated, showing that businesses, unions, and households anticipate inflation to calm further going forward. However, there are risks to the inflation outlook, from higher oil prices to the continued impact of the Ukraine war and the effect of El Nino on agriculture, all of which could result in higher food and fuel prices.
“These risks will be a concern for the MPC. So like many central bankers globally, I expect the MPC to take a ‘higher for longer’ approach to policy rates, and we are unlikely to see any interest rate cuts in 2023.”
Lew Geffen Sotheby’s International Realty chief executive Yael Geffen is “cautiously optimistic” about this week’s MPC meeting, and is hoping that the repo rate will remain unchanged. However, the macro-economic picture is “by no means straightforward at the moment”, and thus there is the chance the rate could go up by 0.25 percent.
“We can’t ignore what the Reserve Bank Governor is saying, even if we don’t like the message. Lesetja Kganyago has repeatedly said that the job of combatting inflation is not yet done. Last month, specifically, he said: ‘The arrival of one swallow does not mean that summer is here, we need to see a couple more.’ His concerns include core goods inflation, inflation expectations, and currency weakness.”
Good news though, she says, is the report last week from the Stellenbosch Bureau for Economic Research indicating that South African average inflation expectations have declined for the first time in two years. On the other hand, though, the US dollar is on track for a ninth weekly gain, tax revenue is well below expectations, fuel prices are rising, and, of course, the entire economy is at risk until we have power grid security.
“Regardless of whether or not we see an interest rate increase this week, consumers need to remain conservative in their spending; keep those belts tight. Save where you can and pump any excess you have into servicing the primary debt on your mortgage to bring down your repayments.”
Samuel Seeff, chairman of the Seeff Property Group, expects the interest rate to be kept the same despite some concerns that inflation may edge up again due to the impact of the fuel price hikes and electricity constraints, and the pressure on the Rand. It is “vital”, however, for the economy that the Reserve Bank keeps stability, and if anything, he would like to see a 0.25 percent rate drop at the November meeting as a boost to the economy ahead of the retail season.
“There cannot possibly be any contemplation of a rate hike right now, and we would strongly condemn any hike as completely out of step with current economic conditions. As it is we are seeing the result of the high interest rate reflected in reduced sales volumes, and it was a tough winter period for the market with slow and low volumes.
“While we are back to pre-pandemic levels in terms of the pace of overall sales volumes in the market, the reality is that the market is facing a higher interest rate and we see somewhat of a stuttering market.”
IOL Business