South Africa can expect another interest rate hike in 2023, say economists

Economists at the Bank of America (BofA) have joined other experts in revising their interest rate expectations for South Africa, which are now predicting a 25 basis point hike in November 2023.

BofA economists Tatonga Rusike and Mikhail Liluashvili noted that several risks stemming from oil, food, and currency exchange rates have put renewed pressure on the inflation outlook for South Africa, which has resulted in its revised forecast.

“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,” they added

The economists noted that they now estimate headline CPI will reach 5.2% in September and 5.7% in October – averaging 5.6% in the fourth quarter of 2023.

“We now expect CPI of 5.5% at year-end 2023 compared to 5% in our previous baseline associated with a dovish outlook for monetary policy,” they said.

“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.

“This means the repo rate will reach 8.5% before cumulative cuts of 50 basis points in 2024 and 100 basis points in 2025. We now see inflation returning to 4.5% only in 2025. CPI is likely to average 5.3% in 2024,” the economists said.

The BofA revised outlook for South Africa is in line with those of the Bureau for Economic Research (BER), which noted that the rand’s losses last week – a 3% decrease versus the US dollar – intensified concerns about the deteriorating inflation outlook.

“With this in mind, there is a rising probability that the SARB’s MPC will increase the repo rate by another 25 basis points (to 8.50%, prime rate to 12%) at its next meeting on 23 November,” the BER said.

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