South Africa's central bank is anticipated to raise borrowing costs for the first time in three years, largely due to inflationary pressures stemming from the Iran war, which has led to sharply higher oil prices. All but one of 19 economists surveyed by Bloomberg predict the Monetary Policy Committee will increase the benchmark interest rate by 25 basis points to 7% on Thursday. Traders also price in a quarter-point increase and at least one additional hike by year-end, which would place South Africa among a few central banks, including Indonesia and Mauritius, raising rates amidst global economic shifts.
Despite the widespread expectation of a rate hike, the decision is likely to be close. So far, only fuel prices have been significantly affected, with no clear evidence of broader second-round effects from the Middle East oil shock, and food inflation remains subdued. Andrew Matheny of Goldman Sachs Group Inc. expects a 25-basis-point increase, noting that policymakers will likely want to observe firmer evidence of inflation extending beyond transport costs. The central bank is also expected to raise its inflation forecast from a previous projection of 3.7% for this year, reflecting a higher-for-longer oil price outlook and a potentially protracted conflict.
Conversely, Cartesian Capital Ltd. holds a contrarian view, predicting the central bank will keep rates unchanged. Anthea Gardner, managing partner at Cartesian, argues the South African Reserve Bank (SARB) will likely avoid urgent policy changes without clear evidence of persistently higher inflation. Factors narrowing the chance of a rate hike include improvements in South Africa's fiscal position, a relatively stable currency despite the war, and contained imported inflation. Tertia Jacobs, a treasury economist at Investec, also points to Moody's Ratings' decision to lift South Africa's credit outlook to positive from stable as a sign the shock hasn't spilled over into higher sovereign risk.
Economists like Keabetswe Mojapelo of Rand Merchant Bank also anticipate a 25 basis-point increase, deeming a larger hike unlikely, as the committee will likely want to assess the initial shock without overreacting. Momentum Investments Chief Economist Sanisha Packirisamy expressed that May's increased consumer inflation data to 4.5% may not be enough for another immediate rate hike. However, she warned that headline inflation could remain sticky for one or two months, and underlying price pressures beyond fuel are beginning to broaden, driven partly by services inflation at 4.7% and core inflation rising to 3.8%. A potential severe El Niño weather event could also impact food prices, further complicating the inflation outlook.
Isaah Mhlanga of RMB expects a 25 basis point hike followed by another in July, predicting a shallow hiking cycle compared to 2022 due to already high real interest rates. Adam Furlan of Ninety One projects two to three hikes in total, taking the repo rate to around 7.5%, to keep real rates restrictive for what is primarily a supply-side shock. They anticipate inflation to peak near 5% in Q4 before falling below 4% by mid-next year. However, continued oil price increases or intensifying food inflation could necessitate more aggressive action from the SARB.
