Warning for interest rates in South Africa

South Africans can expect another interest rate hike this year amid concerns over global oil prices.

According to the Bureau for Economic Research (BER), 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 SA Reserve Bank’s (SARB) Monetary Policy Committee (MPC) will increase the repo rate by another 25bps (to 8.50%, prime rate to 12%) at its next meeting on 23 November,” the BER said.

“This view is also informed by the fact that there were already two (out of five) votes for a 25 basis points increase at the July and September MPC meetings.”

Despite the near-term inflation challenges, the November policy decision is unlikely to get the support of all five members.

Large amounts of data for September showed that there will likely be a halt in real GDP growth momentum during Q3 2023.

Although the S&P Global Purchasing Managers Index (PMI) – which tracks sentiment in the private sector – stayed around its neutral 50.0 mark amid an improvement in employment, the ABSA PMI recorded the most significant contraction since July due to declining output and weak demand.

In addition, Naamsa said that aggregate domestic new vehicle sales dropped by 4.1% y-o-y amid higher fuel prices, logistics issues, load shedding and commodity price volatility.

Seasonally adjusted new vehicle sales also dropped by 7.7% quarterly. That said, year-to-date export sales are 8% higher than the corresponding period in 2022.

The 10% decrease in the oil price to below $85/bbl also relieved some fears over the inflation outlook, indicating that another SARB hike in November is not a foregone conclusion.

“Unfortunately, last week’s sharp oil price decline may be short-lived,” the economists said.

This is after the Palestinian militant group Hamas attacked large parts of Israeli territory, with Israel responding by bombing large parts of the Gaza strip.

“The renewed and severe escalation in the long-running feud between Israel and Hamas has the potential to turn into a regional Middle East conflict that potentially involves major oil producers like Saudi Arabia and Iran,” the BER said.

“This concern saw the Brent crude oil trade almost 4% higher at around $88/bbl in Asia this morning. Amid the uncertainty created by the weekend events, gold was trading 1% higher at 06h00 this morning.”

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