Alarm bells for interest rates in South Africa
Economists have warned that the latest inflation print for South Africa will keep the South African Reserve Bank’s Monetary Policy Committee (MPC) on edge, increasing the possibility of another interest rate hike next month.
Stats SA published the latest CPI data on Wednesday (18 October), showing a significant jump in headline inflation to 5.4% in September from 4.6% in August.
While CPI remains within the SARB’s target bank of 3% to 6%, the higher inflation print is likely to push the average for the year to 6%, economists say, which may be too close for comfort for the MPC.
According to Koketso Mano, FNB Senior Economist, the rise in inflation was mainly driven by higher fuel prices and transport costs – thanks to a significant hike in local prices in September. Given another big hike in fuel prices in October, inflation is likely to continue to rise.
Headline inflation is likely to lift to 5.6% in October, the economist said.
“Headline inflation will experience further upward monthly pressure from fuel prices following the over R1 per litre lift in petrol and near R2 per litre lift in diesel prices (in October). Furthermore, the avian flu outbreak that has primarily affected the supply of eggs and will likely spill over to chicken should keep food inflation elevated,” Mano said.
“Unfortunately, an undervalued rand should continue to be a source of upward pressure to broader imported inflation. Overall, we anticipate that headline inflation will average around 6.0% this year, before falling towards target more firmly in 2026.”
This landscape spells worrying news for interest rates, with the Reserve Bank this week indicating that it is still actively tracking the local and global inflation numbers – noting specifically that the current ‘target-bound’ inflation numbers are not yet a prolonged certainty.
“Although domestic headline inflation has returned to within the target range over the past three months, its stabilisation at the target midpoint is not an accomplished fact. A number of global and domestic risks to the inflation outlook remain elevated and few appear likely to unwind in the near future,” the central bank said.
“The MPC will continue to monitor incoming data and act appropriately to steer inflation back to the midpoint of the 3–6% target over the medium term.”
Where to from here?
FNB said that the price pressures on households are expected to be more persistent than earlier expectations. This supports monetary policy remaining restrictive, with upward risks to interest rates should prices lift further above central bank targets.
There is a strong likelihood that the “higher (interest rates) for longer” theme prevails, it said.
Economists at Nedbank hold a similar view – albeit more optimistic about interest rates still being held at current levels at the MPC’s next meeting.
“Inflation will probably rise slightly in the coming months. Upward pressure will stem mainly from higher transport costs, resulting from fuel prices. On balance, the risk to the forecast still resides on the upside,” Nedbank said.
“With inflation expected to remain within the target range and monetary policy already very restrictive, the SARB will probably leave interest rates unchanged in November and start a mild easing in 2024.”
However, the bank said that with the risk of further US interest rate hikes and its likely adverse implications for the rand – as well as the uncertainties around load shedding, domestic weather
patterns, and global oil prices – the MPC will remain in a “hawkish state of mind”.
Luigi Marinus, Portfolio Manager at PPS Investments, said that the latest figures could push the Reserve Bank to hike rates in November.
He noted that in the most recent MPC meeting, three MPC members opted for unchanged interest rates while two members opted for a 25-basis point increase.
“This occurred when the latest inflation prints were 4.7% and 4.8%. The September print of 5.4% makes the likelihood of a rate increase even more likely, even though inflation is within the target band, as the inflation trajectory appears to be increasing,” he said.
Bank of America economists Tatonga Rusike and Mikhail Liluashvili, meanwhile, are more sure that the pressures on inflation will result in a likely rate hike.
“Higher oil prices and an outbreak of bird flu – leading to shortages of poultry products – will likely raise food prices in the near future,” they said.
“Oil prices are also close to $90 per barrel, while USDZAR is weakening near-term. A strong USD to year-end means a weaker ZAR as global interest rates are set to stay higher for longer. Near-term fiscal risks are likely concerning for the SARB as well.
“The South African Reserve Bank (SARB) is likely to hike rates by another 25 basis points at the November MPC before initiating cuts in the second quarter of 2024.”
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